March 5, 2019
Summary Compensation Table: Why Are You Reporting Dividends as “Other Income”?
– Broc Romanek
A member recently sent in a note wondering why some companies were reporting dividends in the “Summary Compensation Table.” She noted that if a company reports the fair market value of an award in the SCT, any subsequent dividends that are paid on the shares (whether prior to – or at – the vesting date) are not reported as compensation expense in the financials (provided the underlying shares vest). And therefore, dividends do not need to be reported in the SCT.
If dividends are paid on a current basis and the shares are subsequently forfeited, those dividends are charged to earnings and would be required to be reported in the SCT. Because paying dividends on unvested shares is considered a bad compensation practice, most companies accrue the dividends and only pay them when the shares vest, thus the reporting of dividends should be rare (if ever). The fact the dividends are treated as taxable income has no bearing on the accounting or proxy disclosure. For support, the member sent this relevant accounting standard:
Paragraph B93 in the Basis of Conclusions of the Financial Accounting Standards Board’s (“FASB”) Statement 123 (revised) – Share-Based Payment states the following:
The fair value of a share of stock in concept equals the present value of the expected future cash flows to the stockholder, which includes dividends. Therefore, additional compensation does not arise from dividends on nonvested shares that eventually vest. Because the measure of compensation cost for those shares is their fair value at the grant date, recognizing dividends on nonvested shares as additional compensation would effectively double count those dividends. For the same reason, if employees do not receive dividends declared on the class of shares granted to them until the shares vest, the grant-date fair value of the award is measured by reducing the share price at that date by the present value of the dividends expected to be paid on the shares during the requisite service period, discounted at the appropriate risk-free interest rate.