The Australian Council of Super Investors has condemned payment of hidden dividends on unvested shares.
THE powerful 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.
Several 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.
Condemning the practice, ACSI chief executive Ann Byrne said yesterday that it was ''inappropriate'' that dividends were paid to executives on incentive scheme shares that had not vested. ''If the shares don't vest [these] dividends should be paid back to the companies,'' said Ms Byrne.
''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.
''It's just another thing shareholders have to deal with in terms of getting more transparency on pay.''
Some companies had amended their processes and others had chosen not to pay the hidden dividends as a result of discussions with ACSI, Ms Byrne said. ACSI speaks for institutions presiding over some $350 billion in Australian superannuation 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.
The payments also 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.
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, United Group and Perpetual. Perpetual and Emeco have said they may review their schemes.
Michael Robinson, director of remuneration consultancy Guerdon Associates, said yesterday that 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, said Mr Robinson, to pay out 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.
The ASX Corporate Governance Council is yet to deliberate on the practice of paying dividends from stock which has not vested. The new chairman of the council, Alan Cameron, was unavailable for comment yesterday.
The ASX corporation buys stock on market from which it pays dividends to its management, before the stock vests. The payments are modest and disclosed in the remuneration section in the annual report.
Last financial year, each participating employee received an average $2300 in franked dividends and former CEO Robert Elstone about $46,000.
Frequently Asked Questions about this Article…
What are “hidden dividends” on unvested shares and why should investors care?
Hidden dividends are dividend payments made on performance or incentive shares before those shares have actually vested. Everyday investors should care because executives can receive returns on shares they may never be entitled to, reducing transparency around executive pay and potentially shifting tax or economic costs onto ordinary shareholders.
Why has the Australian Council of Super Investors (ACSI) condemned payments of dividends on unvested performance shares?
ACSI, led by CEO Ann Byrne, calls the practice inappropriate and says dividends paid on unvested incentive shares should be paid back when performance pay hasn’t been earned. ACSI also requires disclosure of the practice and asks companies it engages with to stop doing it, citing the need for greater transparency on pay.
Which Australian companies have been identified in the article as paying dividends on unvested performance shares?
The article names Wesfarmers, Emeco, United Group and Perpetual as more prolific practitioners. It also notes Perpetual and Emeco have said they may review their schemes after discussions with ACSI. The ASX itself also buys stock on market and pays modest dividends to management before vesting, disclosed in its annual report.
How can dividends on unvested shares affect shareholders and taxation?
These payments are often fully franked dividends, which means shareholders effectively bear the tax credits associated with those dividends. If dividends are paid on shares that later don’t vest, shareholders may end up funding tax-effective payments to executives without the executives ever meeting the performance conditions.
How do long-term incentive share plans normally work and how do dividends fit in?
Long-term incentive plans typically grant performance shares that only vest if certain performance hurdles are met (for example, a share-price rise of 15% over a set period). Normally the executive only becomes entitled to the bonus once the shares vest, but some boards allow executives to receive dividend returns from the performance stock before vesting.
What actions has ACSI taken or recommended to address hidden dividend payments?
ACSI requires disclosure of the practice, asks companies it engages with whether they pay dividends on unvested shares and requests they stop. ACSI has also encouraged companies to repay dividends where performance pay hasn’t been earned, and says some companies have amended processes after discussions.
Are there alternative structures to paying dividends on unvested performance shares that balance incentives and transparency?
Yes. Remuneration consultant Michael Robinson suggested alternatives such as paying dividends at the end of the performance period when shares have vested or collecting dividends in a trust and using those amounts to pay bonuses. Those structures can preserve incentive effects while improving disclosure and fairness.
What is the ASX Corporate Governance Council’s position and how does the ASX handle dividends on incentive stock?
The ASX Corporate Governance Council has not yet deliberated on the specific practice of paying dividends from unvested stock; its new chairman Alan Cameron was unavailable for comment in the article. The ASX corporation itself buys stock on market and pays modest dividends to management before vesting, and those payments are disclosed in the remuneration section of the annual report (the article cites average participating-employee payments of about $2,300 and a former CEO receipt of about $46,000).
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