THE peak body for industry superannuation, the Australian Council of Super Investors, has condemned the payment of hidden dividends on unvested shares, calling for management to "pay back the money" in cases where performance pay has not been earned.
As revealed in Weekend Business, a number of leading Australian companies are hiding payments to management by paying dividends on performance shares, meaning executives are getting a return on performance stock to which they may never be entitled.
Ann Byrne, the chief executive of the ACSI, said yesterday it was "inappropriate" that dividends were paid to executives on incentive scheme shares which had not vested.
"If the shares don't vest, [these] dividends should be paid back to the companies," Ms Byrne said.
"ACSI guidelines require that this [practice] is disclosed ... we ask companies which we engage with whether they are doing this and, if they are, request they do not," she said.
Some companies had amended their processes and others had chosen not to pay the hidden dividends as a result of discussions with ACSI, she said. The council speaks for institutions presiding over some $350 billion in super funds.
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 executives on shares that have not, and may never, vest.
Ms Byrne said there was no evidence of management paying back proceeds from programs where shares had not vested.
The more prolific practitioners include Wesfarmers, Emeco, UGL and Perpetual. Perpetual and Emeco have said they may review their schemes.
Michael Robinson, director of remuneration consultancy Guerdon Associates, said schemes involving dividends were useful for incentivising management to deliver dividend returns to shareholders. However, the disadvantage of some schemes was that there was no requirement for disclosure.
It might be preferable, Mr Robinson said, to pay dividends at the end of the period when the shares vested, or devise a structure where the dividends collected in a trust were used to pay bonuses. In that way, they could still be tax effective.