Compare the pension plans of Coca-Cola and PepsiCo
Pension schemes are legal contracts entered as part of an employment contract with the aim of providing income to an employee after retirement; there are government-operated schemes while others are private schemes operated by companies on behalf of their employees. Having an elaborate pension scheme is one way of staff management and motivation. Coca-cola and Pepsi are international beverages companies who operate different pension schemes. Despite the differences in the schemes, the expected result is the same that they will benefit their employees at retirement and act as a motivational policy in current work force.
Coca-Cola operate a defined pension scheme in accordance to SFAS, 87, Employers Accounting for pension; under the system the company promises to pay a retiree a monthly pension amount calculated using a formulae that incorporate the number of years that the employee has served the employer and his productivity during his time of office. When paying the pension amount the most important things is the tenure of service and age of the retiree.
In Coca-Cola, they have postretirement policy that is accounted for in accordance of SFAS, 106 Employers Accounting for postretirement benefits other than pension,. On December 31st 2006, the company adopted equity accounting policy for its pension schemes. After the adoption of equity method, the company recorded a reduction of its recorded pension amount by $288million. In February and October 2007, the company restructure its pension scheme to reduce its burden from medical expenses, which accrued, to increased number of retirees. This was in the efforts of ensuring that the scheme operated effectively without injuring the company.
Because of the adjustment, the company was able to save $435 in the form of retiree’s medical expense bill. At the end of 2007, the accumulated benefit obligation amounted to $3,080.in the United States, the company sponsors a 100% of pension contribution to those qualifying people up to 3% of the compensation; the amount that the company contributed in 2007 in United States alone amounted to $27 millions. In other countries, not all enjoy the benefits of the schemes, in 2007, those countries, which benefited from the scheme were paid for an amount of $25 million.
Pepsi pension scheme is available to it united state employees but limited to some counties in other nations of its operation base. Under the scheme, the benefits that will accrue to a retiree are calculated after comparing the years of service or both years of service and the contributions that the employee had on the business. Under the scheme, there is a medical facility scheme covering retiree medical expenses to a certain ceiling.
When retirees exceed the set maximum, he is expected to cater for the remainder. The management form their experience have coined the strategy that they feels will fit the company well; they have invested in some assets from the money contributed from the asset and expected that the returns from the assets will have a positive impact in the life of a pensioner. On December 30th 2006, the company adopted equity accounting policy for its pension schemes (Pepsi Corporate Website, 2011).
The company uses Moody Aa Corporate Bond Index to gauge the performance of its pension scheme, it aims to have a constant flow of income from the diversified investments of pensioner’s funds. The company have total expected pension benefit liability of $658 as at 31st December 2007.
Calculate the relevant rates that were used by Coca-Cola and PepsiCo in computing their pension amounts
Both the companies adopted actuarial methods of forecasting and accounting for their pensions; they considered various percentages as their bases of computing pension amounts. To determine the amount of pension to offer, they considered the duration that the employee had worked in the organisation, the contribution he had mad in the organisation, his last salary scale when leaving the organisation and the operation of the scheme in place.
Coca-Cola
The company calculated the rate of return from pension funds on annual basis, in 2007, the rate that was used as the actuarial rate of return was 8.5% of the net periodic pension cost. The expectation was met in some diversification of the pension fund with a return of 8.3% from 10-years annualized return on U.S. plan assets, from 15-years annualized return the company earned 11.2%, the accumulated annualized-pension return was 11.7%. in 2007, 3% of the company’s pension assets were invested in the company’s common stocks.
Pepsi
The companies expected long-term rate of return on U.S. plan assets was at 7.8% in 2007; the amount is expected to be built from equity strategies whose rate was expected to be 9.3% and fixed income strategies which were expected to give a return of 5.8%. at any one point, the company targets to have a 6:4 ratio of equity strategies and fixed income strategies. In 2007,, the company managed to have 61%, 38% and 1% in equity strategies, fixed income strategies and other primary cash respectively as its distribution of pension assets. The policy limits the investment into Pepsi Limited shares to 10% of the total pension scheme assets.
Determine which company you would rather invest in if you were a potential shareholder
The main reason why shareholders invest in a company is to built their wealth, rational investor are willing to put their bet in those companies that respect and look into their expectations; he is likely to invest in the company that have a bright future with constant supply of income (Carlon, 2009). They are also willing to invest in those companies they are assured of some gains at the end of the year. Let us compare the two companies in the areas that interest a shareholder:
Comparison of profits between the two companies
Both companies are having increased incomes for the past three years, the rate of increase of profits in the same companies is the same.
Net income per common share
From the analysis above, the net income that can be attributed to each share are higher in Pepsi limited, since an investor (shareholder) look for the place that he can get higher returns of his investments, I would thus invest in Pepsi limited.
Analysis of cash dividend paid per share
From the analysis above it is evident that Pepsi paid higher cash dividend in the three years under comparison, secondly the rate of increase in the dividends paid is increasing at a higher rate than that of Coca-Cola. The dividend payout is one of the benefits that shareholders are interested. Pepsi has an upper hand than Coca-Cola.
Changes in Fixed assets
It is worth noting that the total assets of the companies are relatively at the same level. However, the profit production of Pepsi is higher than that of Coca-cola; this is an indication that the management of Pepsi is better than that of Coca-Cola. It has better management of its assets for the benefit of producing income to the shareholders. The increased assets show that the company is adding more assets to be in line with going on concern.
After the analysis of the financial performance of the two companies, I would invest in Pepsi Limited since its management is more efficient than that of Coca-cola as reflected in the way they utilize their assets. Pepsi looks into the need of shareholders more than Coca-cola; the company reflects this in the dividend payout (Kieso, Weygandt & Terry, 2009).
Which company of the two I would like to work for
Employees are the driving force of an organisation; they need to be compensated well for their service to ensure that they are motivated and have their spirits high. Through there is no ideal employer, a good employer should offer his employees the chance to exercise their intellectual property: invention and innovation. I would like to work in an organisation where my efforts are recognised and rewarded accordingly.
For example if an employee has innovated better ways of doing things, he need to be motivated either monetary or non-monetary. This will motivate him work harder and innovate more and will be a challenge to others to innovate so as they can benefit from recognitions sets aside.
From an analysis of the two companies’ employees’ relations, I would be more willing to work for Coca-cola than in Pepsi. The company employs people from all parts of the world thus benefiting from diversity is easy; when working there, I will get the chance to interact with people from different parts of the world since the company has branches and outlets located in different parts of the world. Secondly, the company has embarked on massive acquisition and innovations, these practices offer challenging environments that I believe will be crucial in building my career.
Although Pepsi also is innovating and acquiring other companies, it is lagging behind compared to Coca-cola. I like the policy of free expression as administered in Coca-cola corporate plan. Under the system, it aims at rewarding and recognising those employees who have developed something or a certain process to the benefit of the company. The policy may be there is Pepsi but it is not as elaborate like that of Coca-cola. The pension scheme of Coca-cola is better managed than that of Pepsi.
Coca-cola has adopted a knowledge management policy; knowledge management is a new management tool that aims at developing information and knowledge to empower employees and organizational process for better ways of doing business. It aims at high efficiency and effectiveness in an organization. A process entails involving all employees to come up with creative ways of conducting business in the changing business environment. With such a system employees are likely to be motivated as their contribution in the company’s operation are recognised by the system (Coca-Cola Official Website, 2011).
References
Carlon, S. et al. (2009). Accounting: Building business skills. New York: John Wiley & Sons.
Coca-Cola Official Website. (2011). Coca-Cola. Web.
Kieso, E., Weygandt, J., & Terry D. (2009). Intermediate Accounting. New York: John Wiley & Sons.
Pepsi Corporate Website. (2011). Pepsi. Web.