Stealth Compensation: Do CEOs Increase Their Pay by Influencing Dividend Policy?

42 Pages Posted: 10 Aug 2010 Last revised: 16 Jan 2014

See all articles by Kristina Minnick

Kristina Minnick

Bentley University

Leonard Rosenthal

Bentley University - Department of Finance

Date Written: May 29, 2012

Abstract

Companies can increase executive compensation by allowing dividends to be paid on unvested restricted stocks grants, also known as stealth compensation. Examining all S&P 500 firms over the period 2003-2007, we find that more than half of the dividend paying firms allow this practice. We look at whether this form of compensation reduces agency costs or decreases value for shareholders. We find that CEOs’ stealth compensation amounts to an average $180,000 in additional income, which increases the CEOs’ cash compensation and total compensation by 9% and 2% respectively. Firms engaging in stealth compensation have higher dividend payout ratios than those not allowing stealth compensation. For all firms using stealth compensation, there is a reduction in average ROA and Tobin’s Q over the long run. However, stealth compensation companies with potential agency issues see a meaningful improvement in their long run performance. For weakly governed companies, stealth compensation may act as a bonding mechanism which may serve to reduce agency costs and therefore increase shareholder value.

Keywords: Executive Compensation

JEL Classification: G3

Suggested Citation

Minnick, Kristina and Rosenthal, Leonard, Stealth Compensation: Do CEOs Increase Their Pay by Influencing Dividend Policy? (May 29, 2012). Available at SSRN: https://ssrn.com/abstract=1656154 or http://dx.doi.org/10.2139/ssrn.1656154

Kristina Minnick (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

HOME PAGE: http://www.profminnick.com/

Leonard Rosenthal

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

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