Amid the drive to tie executive pay more closely to company results,
a little-known and poorly disclosed practice is allowing many executives to
receive hundreds of thousands of dollars a year in dividends on performance
stock -- shares that they may never earn.
The money involved isn't huge by the standards of overall executive pay, but it
can add up. General Electric Co. (GE) Chief Executive Officer Jeffrey Immelt,
who gets a growing share of his compensation through what GE calls "performance
share units," received more than $1 million last year in dividends on unearned
restricted and performance shares.
Gary Neale, chairman and former CEO of NiSource Inc. (NI), a Merrillville,
Ind., utility-holding company, is in line to receive more than $827,000 in dividends
this year on performance shares he hasn't yet earned.
Performance, or "phantom," shares are a form of restricted stock
paid to an executive only if the company meets certain performance targets.
Dozens of other CEOs are paid dividends on unvested restricted stock, which
typically requires the recipient only to wait several years before actually
receiving the shares, regardless of performance.
Bank of America Corp. (BAC) CEO Kenneth Lewis is in line to receive $2.89 million
in dividends on restricted stock this year. Altria Group Inc. (MO) CEO Louis
Camilleri received more than $2 million in dividends on restricted stock last
year, even though he won't earn some of the shares until 2011.
All told, among the 50 large-company CEOs who received the largest dollar grants
of restricted stock over the past three years and whose companies pay dividends,
37 are paid dividends in cash before the shares vest, according to an analysis
for The Wall Street Journal by Equilar Inc., a San Mateo, Calif., compensation-research
Corporate-governance watchdogs and executive-pay consultants say the dividends
on performance shares undermine the effort to link pay to performance. "It's
more stealth compensation," says Paul Hodgson, a senior research associate
at the Corporate Library, which monitors corporate governance.
"There's a sleight of hand there that's frustrating" when companies
tout pay-for-performance plans but pay executives dividends, says Brian Foley,
managing director of pay consultancy Brian Foley & Co. in White Plains,
The dividend payouts typically aren't well-disclosed in corporate proxy filings
with the Securities and Exchange Commission. Companies usually state whether
they pay dividends on restricted or performance shares, but totaling an executive's
holdings in unvested stock can require hunting through the proxy, or multiple
proxies. Dividend payments usually aren't included in proxies, so investors
in most cases have to track those down and do their own math.
Dow Jones & Co., publisher of The Wall Street Journal, pays dividends to
the holders of "contingent stock rights," a form of performance shares.
Dow Jones does not disclose the total amount of dividends paid to executives
who hold contingent stock rights.
Disclosure could soon become more transparent. As part of its overhaul of compensation-disclosure
rules, the SEC has proposed that companies detail dividend payments to top executives.
The new rules could take effect in time for next year's proxies.
Meanwhile, the number of executives eligible to receive dividends on unvested
shares likely has been rising as performance and restricted shares become more
popular. For one thing, new rules that require companies to record stock options
as an expense have made the shares a preferred alternative. And in response
to criticism that too many CEOs are paid big bucks for lousy performance, a
growing number of restricted-stock awards are linked to profit or share-price
performance. At the same time, a 2003 tax cut spurred many companies to increase