All I want for Christmas is …

by Michael West | Dec 10, 2011 | Business

One of the joys of this humble and downtrodden vocation is the opportunity to relive one’s youth with a good old game of hide and seek.

We enjoyed a couple of terrific games this very week: one with the engineering group UGL and another with funds manager Perpetual.

They were nothing if not elusive and the reason they were ducking for cover is that these are two of the leading lights in the latest and greatest executive pay racket – hidden dividend payments on unvested shares.

Readers will be aware that executive bonuses often take the form of long term incentive share plans with performance hurdles. For instance, if the share price rises by, say, 15 per cent, the executive becomes entitled to get a bunch of shares after, say, a three-year period when this performance stock “vests”.

It is only then, when the stock vests, that the executive becomes entitled to the bonus. But boards and their remuneration consultants, bless them, have devised a way for executives to get their mitts on these stock returns before vesting: that’s right, before they actually become entitled to the shares.

And how do they do that? Lights, trumpets, drum roll … by paying dividends!

But of course. Even though performance hurdles have not been met, even though the bonus stock has not vested – not been earned – tens of millions of dollars have been ripped out in hidden dividends across out leading corporations.

We can sense you, dear readers, bursting into spontaneous applause over your cuppas on this December morning. What ingenuity, what enterprise, what indefatigable spirit! Where there is a will, there is, indubitably, a way.

The case of UGL is nothing short of awe-inspiring. One of the wealthiest non-founding chief executives in the game, Richard Leupen is already worth $100 million. He picked up a cool $6.6 million last year, up 19 per cent, though shareholder returns were up 9 per cent. Base pay was $2.12 million and bonuses $4.52 million.

The hidden treasure however is that if dividends remain steady, this year he will enjoy about $700,000 in dividends on performance stock which is yet to vest. Love that work! Fourteen times the average wage in cash payments that don’t appear in his pay table is downright flair. But wait for the steak knives…

There is also, besides the sheer cash of it, a barbecue-king tax lurk in the mix. You see, these dividends just happen to be fully franked, so the good old shareholder – thanks for coming – has paid Richard’s tax for him. Richard will pay a spiffing 16.5¢ in the dollar on the dividends he is due to receive as a result of his labour.

Bear in mind that no shareholder approval is required at the annual meeting for shares bought on market, only new shares issued. Shareholders didn’t even get the chance to knock back this tidy little number.

So, in Richard’s case he will receive north of $700,000 in fully franked dividends a year on shares – bought for him on market – which have not yet and may never vest because he has yet to, and may never, achieve the performance benchmarks to which he signed up.

It may be that Richard is a special case. Inking his 19th acquisition on the trot earlier this week he told a reporter, “I’ve got a really good feeling about this one”.

“In paying a knock-down $120 million for the British-based global property services group DTZ Holdings, Leupen’s perfect record should remain intact,” said the story. Nineteen rippers on the trot seems almost superhuman, to be sure.

But Leupen is by no means alone. Plenty of other companies are in on the dividend lurk. Leupen, by virtue of his success, happens to have plenty of shares, and hence plenty of dividends.

Perpetual, also a leading practitioner in the unvested dividend sector, finally come out punching yesterday with “it meets our good corporate governance standards”. Cough, splutter, regain composure.

Lofty standards indeed – paying hidden dividends to star executives from no less than 7.76 per cent of Perpetual’s shares on issue. These are “retention” shares mind you, so the deal is “we’ll give you the stock if you stick around but we’ll slip you these divvies on the way through”.

For some of these executives though the deal is something of a Faustian pact. Many are fund managers, Perpetual’s stars, whose business is to vote on the performance and governance of other companies in which they are major shareholders.

The question is, if Perpetual is so proud of its remuneration policy why does it not disclose and break out this component of its payments to executives? Why is it not revealed in the tables in cash pay?

It is true that it is possible if one is an expert in remuneration, to deduce from the accounting valuations on share-based payments that UGL, Perpetual and others pay dividends on unvested stock.

But no fair minded observer could claim that the cash was disclosed. Oh dear, how time flies when you’re having fun. No time now to list all the companies who pay dividends on unvested shares – let alone their responses. We shall have to make it a two-part series. No, make that an industry-best-practice cross-platform investigation. And let’s not forget “exclusive”, one must keep up with the Joneses. Stay tuned Monday.

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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