The Advisors' Blog

– Liz Dunshee

Here’s a Crain’s article discussing the “stealth compensation” practice of paying dividends on unvested stock. About 10% of the S&P 500 are still doing this – even though it’s disfavored by shareholders and it’s a “no-no” under the ISS Equity Plan Scorecard and say-on-pay analysis.

There’s a reason executives don’t want to let go of this feature – it tends to increase salary by about 25%. And that number only increases as the stock market climbs. Moving away from this practice probably requires some “weaning,” as this excerpt notes:

In 2016, JPMorgan began granting Dimon a type of restricted stock that doesn’t pay dividends before vesting, but several top executives at the bank are still paid dividends on unowned shares. Asset management chief Mary Callahan Erdoes received $613,000 this way that year, while $580,000 went to Daniel Pinto, head of corporate and investment banking, according to calculations by Crain’s based on data in the firm’s most recent pay-disclosure statement. The firm declined to comment.

Philip Morris International is also trying to wean its CEO off this type of dividends. Under a new plan, only 40% of the restricted shares granted to Calantzopoulos pay dividends before vesting, down from 100%, a spokesman said. The representative did add that the dividend-paying unvested shares “incentivize executive retention” and “align executive interest with that of the shareholders.” Like most tobacco companies, Philip Morris’ dividends are quite generous, with the firm’s $6.5 billion 2017 payout exceeding its profits by about $200 million.