Coke Bucks Standard, Gives 15-Year Stock Options to 7

Coca-Cola Co. has bucked standard compensation practice by issuing stock options that give employees five years more than the typical option grant to benefit from increases in the soft-drink maker’s share price.

The Atlanta-based company recently gave seven executives, including retiring Chairman and Chief Executive M. Douglas Ivester and his successor, Douglas N. Daft, stock options with shelf lives of 15 years, according to regulatory filings released Tuesday. The vast majority of stock options that U.S. companies award to executives and other employees must be exercised within 10 years.

Stock options have become the compensation of choice in many parts of the corporate U.S., letting companies minimize cash salary payments and permitting executives to reap millions of dollars in profits if stock prices rise. Providing more time to exercise stock options will enhance their potential to generate big gains.

The length of the option “is where a tremendous amount of the value is,” said Arthur Kroll, chief executive of KST Consulting Group Inc., a New York-based company that helps CEOs design compensation plans.

In general, options let the holder buy a certain number of company shares at a set price in the future. The longer that period lasts, the better the chance the market price of a company’s shares will exceed the exercise price of the options, letting the holders profit by purchasing shares at a discount.

The traditional 10-year figure derives from Internal Revenue Service rules that mandate a maximum exercise period of a decade for so-called incentive stock options that provide tax advantages to the recipient. Most companies have adhered to the 10-year period even though most of the options they issue aren’t qualified for the tax advantage and thus aren’t subject to the time restriction.

About 80 companies have stepped away from this custom by establishing compensation plans that permit them to grant exercise periods of more than 10 years, according to Executive Compensation Advisory Services of Alexandria, Va. Coke and Procter & Gamble Co., though, are among a very few that have actually issued options with longer terms.

“It’s something we have expected to see more of,” said Carol Bowie, director of publications at Executive Compensation Advisory Services.

If such a trend does develop, it could be a cause for concern among shareholders. The reason: longer-term options will increase the overhang of unissued stock that may dilute future earnings per share, often a critical determinant of a stock’s price. Investors so far, though, have proven willing to overlook such hazards.

“Companies like Microsoft, Intel and Cisco have huge overhangs,” Kroll said. “It hasn’t seemed to do too much damage to the prices of their stock.”

Ivester, whose plans to step down in April were announced on Monday, got an option to buy 250,000 shares at $53.40 each through 2014, according to documents filed with the Securities and Exchange Commission.

Coke shares skidded $5.63 on Tuesday to close at $59 on the New York Stock Exchange.