Annual Meeting May 2

PepsiCo CEO Indra Nooyi’s compensation increased this year, crossing the $30 million threshold by more than a million dollars. Her annual bonus remained $5.25 million, despite performance challenges; and the targets needed to reach that bonus were lowered. Nooyi is paid 650 times the median PepsiCo employee.

Nooyi's package from last year placed her at number 50 on our most recent list of Overpaid CEOs. The HIP Investor regression found that last year’s total compensation of $29,783,416 was $11,243,107 in excess of what would be predicted based on performance. (For information on how that was calculated see Appendix C in our report at

This year pay is up to $31,082,648. This includes $14.7 million in non-equity compensation, of which $5,250,000 was in annual bonus. Nooyi’s annual salary of $1.7 million is well above that of most S&P 500 CEOs. I consider high salaries are a tell of problematic compensation because it inflates other features. Her annual bonus is targeted at 225% of base salary.

I noticed that the that the annual bonus has been identical in each of the last three years so spent some time looking into that. The proxy statement has great disclosure of formulas and metrics for the annual bonus. The formula has been the same for the past three years: Base salary x Target Opportunity x (business performance weighted 70% + individual performance weighted 30%). The same five metrics have been used in each of the past three years, and helpful charts outline the financial goals, performance targets, and actual results from each of these.

This certainly gives every impression of transparency, but that is an illusion. There’s a lot of verbiage, wonderful graphics, but reading through it all does not tell you how the figure was ultimately arrived at. Once sentence among the many in the proxy statement: “In determining bonus payouts, the Compensation Committee also considered other quantitative and qualitative factors including share of retail sales performance as well as the impact of share repurchases on financial results.”

A reading of the current proxy also leaves out an important fact: goals have been lowered, performance has declined, but the same annual bonus has been paid in each of the past three years.   

This is only apparent if you look at data from prior proxy statements. In 2015, the goal for organic revenue growth was “mid-single digits.” For 2017 that same metric had a goal of “at least 3%.” The company failed to meet that goal. The company states, “Consistent with our pay-for-performance principles, the payout with respect to the organic revenue goal was below target and the payout with respect to the other metrics was above target as the goals were exceeded.” But it is not clear how that failure affected the over $5 million annual bonus.  

Other targets were also lowered between 2016 and 2017. The organic revenue growth performance target declined from 3.7% in 2016 to 3.3% in 2017.  The actual organic revenue results declined from 3.7% in 2016 to 2.3% in 2017. Free cash flow goal declined from $7.8 billion in 2016 to $7.2 billion in 2017; actual free cash flow results fell from $7.8 billion to $7.3 billion.

With two other metrics (core constant currency EPS growth and in core net ROIC improvement) the goal remained the same, though actual results declined.  The only area where the target was higher for 2017 was the core constant currency net income, and the higher 2017 goal was still well below 2016 achievement

And yet, despite these lowered goals and reduced achievement the annual bonus paid out at $5.25 million for 2017.  Why is the bonus the same despite the changes in performance? 

Annual incentive also feeds into Nooyi’s pension fund. Nooyi, who joined the company in 1994, is retirement eligible. The current value of her pension is estimated at over $33 million.

I did not do a similar analysis for long-term incentive compensation given time constraints, but hope that others will.

I once spoke with a compensation consultant who told me that there were clients who came in with Jeopardy answers: the bonus is $5.25 million. Management would approach a consulting firm and essentially asked, “What is the formula that will get this bonus?” Impossible to know what goes on behind closed boardroom doors, but one has to wonder in this case.  

Rosanna Weaver