Friday, May 05, 2006

Newest executive pay issue: dividends on unvested restricted stock

An article in the WSJ today throws light on yet another murky executive pay practice. The recent furore regarding stock options has resulted in many companies opting to compensate their executives through restricted stock instead. Restrictive stock is in general a better way to align incentives as it is paid out only if the company meets certain performance targets. However, many companies pay dividends to executives on these unvested restricted stock, i.e. stock which the executives dont even own! They may own the stock in the future IF the performance targets are met, but they are paid dividends today.

"All told, among the 50 large-company CEOs who received the largest dollar grants of restricted stock over the past three years and whose companies pay dividends, 37 are paid dividends in cash before the shares vest, according to an analysis for The Wall Street Journal by Equilar Inc., a San Mateo, Calif., compensation-research firm.

Corporate-governance watchdogs and executive-pay consultants say the dividends on performance shares undermine the effort to link pay to performance. "It's more stealth compensation," says Paul Hodgson, a senior research associate at the Corporate Library, which monitors corporate governance."

The full article is here.

New SEC rules will require better disclosure of these dividends on unvested stock, but not disallow this policy.

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