Teardown 8: Mondelez
International food and beverage giant continues to stimulate growth and operational excellence
Mondelezez is an American food and beverage company operating in over 160 countries. Headquartered in Chicago, the company employs over 80 000 people worldwide, and its current market capitalization exceeds $89.85 billion.
Founded in 1923 as Kraft Foods, the company split and rebranded itself in 2012 with a grocery business operating under Kraft Foods Group and food, beverage, and confectionary renamed as Mondelez.
Mondelez operates a number of international brands such as Belvita, Chips Ahoy!, Oreo, Ritz, and LU for cookies and crackers, Milka, Cadbury, Toblerone, and Cote d'Or for chocolates, and Trident, Halls, Stride for gum and cough drops among others.
Despite its established position as one of the market leaders, the company wants to drive growth, global presence, and consumer acquisition by continually improving its business processes in sales, refining marketing, and managing supply chains. Let's how the executive compensation package helps Mondelez achieve its strategic goals.
Executive compensation plans at Mondelez
Main goal: To streamline business processes while building human capital and ownership culture ensuring long-term growth
Means: Mondelez achieves this goal by carefully selecting financial performance metrics and strategic KPI goals.
Elements of Mondelez's executive compensation package
Base salary:
Fixed income forms 10% of the total direct compensation for the CEO Dirk Van de Put, and in 2021 that amounted to around $ 1.5 million. The other named executive officers receive between $ 680 000 and $ 850 000, which equals 20% of the package.
Short-term incentive plan:
STI bonus for both the CEO and other senior executives totals 18% of the compensation package and is 100% at-risk cash award.
In 2021 Van de Put received the annual bonus grant of $2.5 million. His annual bonus forms 185% of the fixed yearly salary while for the other NEOs it ranges between 80% to 100% of the fixed income, and amounting to $ 500 000 - $ 1 million for 2021.
Performance metrics for the STI bonus:
The metrics are the same for the CEO and all other NEOs and comprise 80% of financial measures and 20% of strategic KPIs. The possible payout ranges from 0% to 200% cap.
The financial metrics, weight at 80%, are as follows:
- organic volume growth at 15% weight:
meant to increase the volume of produced products while improving the margins through better capacity usage. Oragnic volume growth is the product volume produced in a specific business process, excluding the impact of any external circumstances such as acquisitions.
- organic net revenue growth at 15% weight:
meant to stimulate an increase in internal sales and market share expansion, volume gains and price optimization. Organic net revenue growth is net revenue excluding the impact of acquisitions, dispositions, and foreign currency exchange rates.
Mondelez believes this is a key metric that will ultimately drive the shareholder value and this is why it occurs here in the short-term incentive plan, as well as in the PSU award in the LTIP.
- gross profit dollars (gross margin) at 30% weight:
the difference between the money generated from sales and the costs of production and selling. Measures the company's ability to manage and balance volume, pricing, and costs encouraging investments that will increase earnings and cash flow.
- operating income at 20% weight:
measures gross profit short of operating expenses, depreciation, and amortization and is meant to track all the operating costs and show if the business operations are effectively managed.
- free cash flow at 20% weight:
measures the cash left after paying for operating expenses and capital expenditures. For Mondelez, it is a crucial metric that assesses their ability to invest in initiatives that will promote further growth and improve operational excellence.
Non-financial metrics, strategic KPIs, at 20% weight: KPIs are the same for all the executives, only the particular targets and annual progress goals vary according to geographic location, particular market condition etc.
Why do the companies select the short-term incentive metrics they do? Wall Streeet and investor expectations that lead to better long-term performance.
Jack Connell
Leading Expert Consultant and CEO at Jack Connell Compensation Consulting
Long-term incentive plan:
The long-term incentive plan at Mondelez is 75% performance shares (PSUs) and 25% stock options.
The CEO and the other named executive officers must hold a certain amount of the company stock for their employment at Mondelez. This comes to 8 times the base salary for the CEO Dirk Van de Put and 4 times the fixed income for the NEOs.
All the executives must meet these requirements within the first five years since their hire or three years after promotion. The shares counted toward the requirements exclude any unexercised options or unvested PSUs. Until a NEO hasn't met the hold requirements, they need to hold all the stock awarded in the equity program. After that, any newly granted shares must be held for at least a year.
The PSU grant:
The award with a 3-year cliff vesting schedule, meaning that the executive receives the shares in one tranche after a 3-year performance period. Additionally, there is a one-year holding requirement post-vesting. The targets can be realized from 0% to cap at 200%.
The performance metrics used in the PSU grant are:
- organic net revenue growth at 25% weight:
meant to stimulate an increase in internal sales and market share expansion, volume gains, and price optimization. Organic net revenue growth is net revenue excluding the impact of acquisitions, dispositions, and foreign currency exchange rates.
Mondelez believes this is a critical metric that will ultimately drive shareholder value. It is an integral part of the PSU grant and the annual bonus. The target is 3.5% for the PSU grant, with a threshold of 1.5 pp below and a maximum capped at 1.2 pp above the target.
- adjusted earnings per share (EPS) growth at 25% weight:
showing the change between the EPS, considered an overall measure of company performance and factor influencing the long-term value creation and shareholder return. The target is set to >7% with a threshold of 1.6 pp below and a maximum capped at 2.5 pp above the target.
- relative TSR at 50% weight:
directly measures the company performance in terms of shareholder value creation against the peer group. The target is the 55th percentile within the peer group, with a threshold at 25th and a maximum at 90th.
Mondelez's compensation committee chose the peer group for the relative TSR from among the food and beverage companies that are the firm's direct competitors for customers and talent. These include Campbell Soup, Coca-Cola, Colgate-Palmolive, Danone, General Mills, Hershey, Kellogg, Kraft Heinz, Nestle, PepsiCo, Procter&Gamble, and Unilever.
The stock options grant:
This is an award with zero initial value, requiring appreciation in price to reap any benefits. The vesting schedule is gradual and set to three years, meaning that options come in one tranche a year.
Benchmarking the executive compensation at Mondelez:
Mondelez compensation committee hired a Semler Brossy independent consultant to craft a competitive compensation package based on the comparison with the peer group. The companies selected for the comparator group had to meet the following criteria:
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similar size: 0.5 x - 2.5 x net revenue and market cap
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international presence with operations and sales outside of the US
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market leaders
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consumer-facing
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incorporated in the US
Based on those traits, the 2021 peer group consisted of 3M Company, Coca-Cola, Colgate-Palmolive, The Estee Lauder Companies, General Mills, Johnson&Johnson, the Kellog Company, Kimberly-Clark Corporation, McDonald's, Nike, PepsiCo, Phillip Morris, The Procter and Gamble, and Starbucks. The compensation committee used this group to benchmark all the elements of the total direct compensation packages and targets, the share ownership guidelines, short and long-term incentive plan design, and to evaluate pay-for-performance alignment.
Traditional American compensation package helps to streamline business processes and secure the company's position as a market leader
The executive compensation plan at Mondelez is an example of a typical American plan for a large public company.
Benchmarked against other retail giants, no wonder it exemplifies all the standard features such as the ratio of 10% to 90% pay at-risk, 18% short-term incentives (compared to 14% for the American median), 72% equity-based LTIPs (78% for the American median), and $ 16.1 million total CEO compensation ($ 17.2 American median).
The main goal of this plan is to focus on the company's growth. Mondelez is an established company with a significant market share and international presence, one of the market leaders. Yet, when facing a fast-changing environment and intense competition, it is crucial to continue to enhance and improve the business processes, operations, and production.
Mondelez achieves this through financial performance metrics. Virtually all the short- and long-term awards are disbursed, granting the satisfaction of those financial targets. And the plan is set up so that the satisfaction of the targets in the STI bonus indirectly supports the achievement of the LTIP goals.
Gross profit in dollars, operating income, and free cash flow are the factors that genuinely encourage the optimization of the processes, balancing the pricing, effective marketing, control of the supply chains, and general improvement of all the internal operations. And indirectly, these have a long-term effect on the stock price and shareholder returns.
Mondelez also relies on the direct determinants of the value, such as stock price in the option plan, adjusted EPS growth, and relative TSR at 38% of the total metrics for the LTIP. The relative TSR directly stands the company against its competitors, influencing decision-making that would allow it to succeed in this particular environment.
And the organic volume growth and organic net revenue in the short-term incentive plan focus the executives' attention on the immediate streamlining of the processes and growing efficiency of the production as well as new and returning client base. In this way, the short-term goals coupled with the medium-term strategies build the foundation for the company's long-term growth.