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. 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., 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. CEO Kenneth Lewis is in line to receive $2.89 million in dividends on restricted stock this year. Altria Group Inc. 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 firm.
According to the article: "It's more stealth compensation," said Paul Hodgson, a senior research associate at the Corporate Library, which monitors corporate governance.
Well, duh. But at least there's some truth in nomenclature for once, in that these stealth CEO dividends are officially called both "phantom" and "unearned." After all, earning your keep is not consistent with our wildly underperforming CEO class (cf. Jeff Skilling, Ken Lay, et al.).
This form of compensation screws ordinary Americans in two principal ways: (1) for shareholders in 401(k) and pension plans, the insane excesses of executive compensation are reducing shareholder value and therefore literally lowering the account balances and taking the savings of tens of millions of US workers; and (2) the lack of taxation on these "unearned" and "phantom" dividends is like a drainpipe on the US Treasury, sucking out millions of dollars that could be used for, say, making the ever-growing mortgage payments on "rebuilding" Iraq.
No Taxation on Dividends — an essential part of the Republican class war against ordinary Americans.