No equivalent for “dividends” at Invesco, others …

April 3, 2012

One of the more curious executive compensation practices to develop over the years is the “dividend equivalent,” also sometimes called hypothetical, unvested or deferred dividends, among other terms. These are dividends, or payments in lieu of actual dividends, that are paid on on shares of stock that the executive doesn’t yet own — a fascinating state of affairs that makes the most sense if you look at it from a perspective of entitlement.

After all, why wouldn’t you also get the dividends on shares you don’t own yet, if you feel it’s destined that you’re going to get them?

One of the most recent examples we saw was at Invesco (IVZ), the big mutual-fund and investment-management company based in Atlanta. There, a whopping $349,783 of Chief Executive Martin L. Flanagan’s compensation consisted of “dividends paid on unvested stock awards,” or the equivalent of nearly half his salary. All told, Invesco’s top five executives got nearly $1 million of these dividend equivalents in 2011, according to the proxy the company filed on Friday.

Like similar sums at a number of companies, Invesco’s dividend equivalents are accumulated by the company until the shares vest, so in that sense it’s not quite the same as interest on money that hasn’t been received yet — in theory, execs might not get to collect — but it’s pretty close. (Under tax law, it matters just when you actually get the rights and benefits of ownership. That’s one big reason for the wide and wonderful variety of deferred pay at large companies.) After all, once the executive does get ownership of the shares, there are all those accumulated dividends waiting for him, like so much interest on a savings account.

In fact, officials at some companies are lucky enough to get all those back dividends plus interest. At McKesson (MCK), according to the company’s June 20 proxy, directors and executives get “dividend equivalents” based on their restricted stock units (which pretty much by definition haven’t vested, since once they vest, they become stock), as we footnoted at the time. For McKesson directors, these sums

“are credited quarterly to an interest bearing cash account and are not distributed until the shares underlying the RSU award are issued to the director. Interest accrues on directors— credited dividend equivalents at the rate set by the Compensation Committee … which for calendar year 2011 is 8.0% per annum.”

In other words, they not only get dividends on shares they don’t yet own, but they get an eye-popping interest rate on top of that, to make up for the time they didn’t yet own the shares. (Got that?) Granted, the interest rate is lower than the total annual return on McKesson stock in recent years, but they’re getting that, too, on the shares; and an interest-bearing cash account doesn’t carry the same risk as an investment in stock. Just try finding 8% interest for a cash account at your local bank.

Other examples of steep hypothetical dividend accruals we’ve run across over the past year: $616,166 for Pepco Holdings (POM) Chairman and CEO Joseph M. Rigby for 2011 (thanks ratepayers!); some $590,000 for NYSE Euronext (NYX) CEO Duncan L. Niederauer, also for 2011; more than $500,000 apiece for four Booz Allen Hamilton executives (or nearly $2.5 million combined) for the fiscal year ending in March 2011; $482,690 for the CEO at Robert Half International (RHI) in 2010; more than $460,000 for the vice-chairman of Realty Income (O) in 2010; and $411,364 for Activision Blizzard (ATVI) CEO Robert Kotick in 2010.

As a workaday employee, I’d love to accrue interest or dividends on pay before I’m entitled to it; it might be a nice perk for shareholders, as well — buy some shares, get last year’s dividends, too! But for us, at any rate, that kind of hypothetical dividend is more like fantasy.

Image source: Bag of dividends via Shutterstock.com

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