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.