Apple Inc. (AAPL), Citigroup Inc (C) & PepsiCo, Inc. (PEP): Shareholders Unite! How We Can Fix Executive Compensation

Using returns on assets rather than returns on equity is also notable. Measuring profitability based on equity returns encourages banks to load up on debt to juice profitability, which in turn makes them vulnerable to unexpected losses.

Shareholders at PepsiCo, Inc. (NYSE:PEP) are also pushing for changes to executive compensation.

The company did away with outright stock option grants last year. Instead compensation is tied to a long-term incentive program based on the performance of the company’s share price and profitability.

In 2012, the PepsiCo, Inc. (NYSE:PEP)’s earnings fell to $6.18 billion, or $3.92 per share. That was down 4% from $6.44 billion, or $4.03 pershare, in the previous year. The company has struggled to turn around operations after losing market share to rival The Coca-Cola Company (NYSE:KO).

As a result, PepsiCo, Inc. (NYSE:PEP) cut CEO Indra Nooyi’s pay package 11% from the previous year.

These changes to executive compensation probably won’t have a material impact on financial results so why should shareholders care?

First, management efforts to address shareholder concerns reflects good corporate governance. That could become an important issue the next time a more important issue comes up like the company’s dividend policy.

Second, better aligning the interests of shareholders and management results in higher investor returns.

Foolish bottom line

While the recent developments are encouraging, shareholders need to continue to push for changes in management compensation. Only by aligning executive interests with shareholders can we ensure the long-term health of these businesses.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Apple and PepsiCo. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), Citigroup Inc (NYSE:C), and PepsiCo, Inc. (NYSE:PEP).

The article Shareholders Unite! How We Can Fix Executive Compensation originally appeared on Fool.com.

Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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