EXCLUSIVE

Cashed up … some companies are paying dividends on performance shares before they have vested. Photo: Jessica Shapiro

LEADING Australian companies are hiding payments to their senior management teams by paying dividends on performance shares, meaning executives are getting a return on performance stock to which they may never be entitled.

Wesfarmers, Emeco, UGL and Perpetual are among the companies making such payments. A spokesman for Emeco told BusinessDay on Friday that the practice was widespread and perhaps used by “50 per cent of blue-chip corporates”.

“A number of blue-chip corporates have a history of paying dividends on unvested shares – three names worth [looking at are] ASX, NAB and Fairfax Media,” the spokesman said in an emailed response.

Executive bonuses often take the form of long-term incentive share plans with performance hurdles. For instance, if the share price rises by 15 per cent, the executive becomes entitled to shares after a certain period when the performance stock ”vests”.

It is only then that the executive becomes entitled to the bonus, but some boards are allowing executives to receive returns from stock before the performance stock vests.

Further, the payments often take the form of fully franked dividends, which means that shareholders are paying tax for their company executives on shares that have not, and may never, vest. It is unclear, though unlikely, whether the proceeds would be repaid in the event the shares did not vest, people familiar with the practice said.

Paying dividends from unvested stock is frowned upon by the few shareholders and governance types who are aware of the practice. The principal objection is the payments are not properly disclosed to shareholders and the market. Further, the payments have arguably not been earned, as there should be no entitlement until the stock has vested.

Some company boards have discussed the practice but elected not to pay dividends on unvested stock.

Already, as a result of the Herald’s investigation into the practice, both Emeco and Perpetual have indicated they may review their policies.

“The Corporations Act does not provide for inclusion of cash dividends on shares in the statutory remuneration disclosure table,” a Perpetual spokesman said on Friday. ”However, we continuously look at our disclosure practices and would certainly take the matter into

consideration when preparing for next year’s disclosure.”

The wealth management company pays fully franked dividends to its top executives and funds managers from 7.76 per cent of its issued capital. The shares are principally retention stock that is yet to vest.

For its part, Emeco has paid $1 million to executives in dividends from unvested shares after selling an asset and changing its pay structure.

”Emeco is guilty of disclosing the payment of dividends on unvested shares. They have also made it clear they have listened to shareholders and are reviewing the LTI [long-term incentive] plan,” a spokesman said.

Wesfarmers has made payments to its executives from unvested stock for some years. Its chief executive, Richard Goyder, is not subject to the plan, a spokesman confirmed last week.

However, the chief executive of the engineering group UGL, Richard Leupen, can expect to receive some $700,000 in hidden fully franked dividends this year, besides his base pay and other benefits. He earned $6.6 million last year.

Neither UGL nor Wesfarmers gave detailed responses to questions from BusinessDay in regard to the amounts paid in hidden dividends over the years. UGL responded in detail about its short-term incentive plan, although it had been asked no questions about this. On long-term incentives it declined to respond to specifics.

”In regards to dividends paid on the performance shares granted under the long-term incentive plan, dividends received over the vesting period are included in the initial calculation to determine the number of the shares granted to an employee,” a spokeswoman said.

Wesfarmers said it had ”always believed in the benefit of employees being shareholders. Currently about 35,000 employees receive shares and associated dividends. It is a share scheme, not a rights scheme”.

Among other companies that have used the practice are the ASX, National Australia Bank and Fairfax Media. Dividends paid on unvested stock by Fairfax Media, publisher of the Herald, are negligible and are believed to have been supported by the board, in light of the ructions that have undermined the newspaper business. In its latest annual report Fairfax disclosed that under its long-term incentive scheme executives ”receive any dividends paid on the shares while they are in the trust”.

The ASX employed the practice for its former chief executive, Robert Elstone, but the structure of its pay for its latest chief executive, Elmer Funke Kupper, is not known.

National Australia Bank has made dividend payments from unvested shares in the past but has changed its policy.

The chief executive of the Australian Shareholders Association, Vas Kolesnikoff, told BusinessDay yesterday that the practice was all about hiding pay and was ”extremely poor governance”.

”It doesn’t get recorded in the name of the executive,” Mr Kolesnikoff said. ”Already, the disclosure of executive pay is too complicated. The remuneration report is all about concealing.”

Companies should also stamp out the practice of interest-free loans to executives, he said, because it was a ”zero-risk” situation, like the hidden dividends.

OneSteel has stopped the practice after pressure from shareholders. Unlike other companies, it did disclose the payment of dividends to executives.