Those sneaky banks

Posted by Marc Hodak on February 1, 2010 under Executive compensation, Invisible trade-offs, Reporting on pay | Be the First to Comment

The headline is:  Bank pay gets boost on the sly.

While the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares they don’t own.

Let me guess which shareholders:

“People at places like Goldman Sachs are going to reap windfalls in dividends from stocks they haven’t earned yet,” says Tony Daley, an economist at the Communications Workers of America.

The union fought similar payouts at General Electric’s 2007 annual meeting after CEO Jeffrey Immelt was paid $1.3 million in dividends—equal to 40% of his salary—on shares he didn’t own. It lost.

“It makes no sense to pay people dividends on shares they don’t own,” Mr. Daley says. “Shareholders should be outraged.”

No sense?  How about this:  if management is awarded beaucoup restricted shares, which by definition they can’t collect for a time, their fond hope is for an appreciation of those shares until they vest.  And the one lever they most directly control in that appreciation is dividends.  Dollar for dollar, the less dividends they pay out, the higher the shares will go.  Soooo, if those communications workers prefer dividends, they should push for the holders of restricted stock to get those dividends, too.  To eliminate the perverse incentive to chop or hold back on dividends.  Which is why boards began awarding dividends on unvested equity, folks.

That part of the rationale was not mentioned in the article.  They didn’t ask me.