Determining and Reviewing Compensation Packages for Directors
Mondelez International (MDLZ) is a multinational snack and beverage company, with headquarters in Chicago, Illinois that manufactures biscuit, chocolates gum, candy, and powdered beverages. The company’s subsidiaries include commonly known brands such as Oreo, Trident, and Cadbury Dairy Milk. A Compensation committee is used to determine and review compensation packages for non-employee directors (NED) and named executive officers (NEO). All members are non-employee directors or outside directors. Furthermore, an independent compensation consultation is retained to advise the compensation committees on varies decisions such as the structure and amount of compensation packages. This ensures a unbiased perspective is considered in the decision-making process. The compensation committee also uses two groups of relevant comparators (Compensation Survey Group) to benchmark compensation incentives. Furthermore, to ensure that NEO’s and NED’s are aligned with shareholders interest both groups are required to own a significant amount of common stock in the company. NEO’s must hold all stocks given through the equity program discussed below until they meet specific stock ownership requirements.
NEO’s compensations have several layers. This includes a fixed base salary, annual cash incentive program and Equity program. In regard to the fixed salary portion of NEO’s compensation are aimed to be a medium value of compensation survey groups, this number can be adjusted based on several factors such as experience and responsibilities. Targeting base salaries at the median of the compensation survey groups, doesn’t allow for executives to receive excessive based salary amounts, but there is still room for executive salary amounts to become excessive if the committee improperly places value on the qualifications of the NEO.
Moreover, the cash incentive program portion of the compensation package that NEO’s receive are based on company and individual performance. Incentives opportunities can be 0-200% of the NEO’s base salary. Targets are set in the beginning of the year and are aligned with company internal and financial and operating plans for the year. The company performance portion of the cash incentive is weighted on different performance measures including; Organic net revenue growth (40%), defined EPS (40%), free cash flow (10%) and cash conversion cycle 10%. This is aimed to motivates executive to meet or exceed various performance measures of the business and not be hyper focus on one aspect of the business. But since Organic net revenue growth and defined EPS make up 80 percent of the weight it is very likely that executives will become hyper focused on growing these two types of performance measures. But by creating a maximum for the incentive program doesn’t create an incentive for the executives to create company growth that is not sustainable in the long run. NEO’s are given cash incentives based on company financials annually on the percent that they fall below or exceed performance targets set in the beginning of the year. This gives NEO’s motivation to create short company growth.
Additionally, NEOs have an equity program to motivate them to align their interest with shareholder interest for long term growth. The equity program is not based on individual performance but solely on company performance, but compensation committee holds the ability to adjust performance rating up to 25 pp. This adjustment ability of the compensation committee gives further incentive for management to provided quality financial data. Performance share units are given to NEO’s basses on targets established for a three-year performance cycle. NEO’s will only receive performance shares of the compensation committee if they have meet or exceed company targets that were established in the beginning of the three-year cycle.
Non-employee officer compensation is paid quarterly, and amount is based on benchmarks of companies in survey groups. Regarding equity compensation, NEO are given annual equity grants in the form of deferred equity grants that are only given six months after director ends service. Since, Non-employee officers cannot receive their shares until after service, it creates motivation to create sustainable growth.
In Conclusion, Mondelez International has several elements of their compensation packages that motivates NEO’s and NED’s to make decisions and perform in a manner that is in the interest of shareholders. Linking compensation incentives with both equity and cash, fixed and variable compensation that are linked to short term and longe- term company goals. Also, since NEO’s cash incentives are linked to individual performance, it motivates NEO’s to perform at a high level personally to meet goals that were set for them. Lastly, the use of benchmarks from comparable firms helps set compensation levels that are competitive but not excessive.
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