The only difference between a Master and a Slave is that they are and cannot be the same.
So now that we have established the boundaries about Master-Slave, lets go about figuring out the erroneous principle of Employee Stock options that “window dresses” the slave to be a potential Owner. ESOP’s, performance based equity, tenure based stock are few names that exist in the vocabulary. The internet is a good tool to find innumerable articles about the efficacy, sustainability and shareholder value maximisation, stock option for employees tries to achieve by tying its top executives. We might debate against or for it, but doesn’t dividend paid out to this set of quasi owners, artificially boost the value of the company?
There might be compelling reasons to believe so it does.
Dividend is not Salary: So basic accounting thumb rule suggests, salary is deducted as cost to arrive at an EBIT. Dividend however pans after all the arrangements with governments via taxes, depreciation and debt. Net income is important for Free cash flow projections of the firm. So imagine lesser equity, as no additional stocks have been issued to employees and a simple bonus is paid out for them. Net income as you may see goes down.
The amount that the Executives will receive as part of dividend announcement shall be just as good as a bonus. However exists one small difference that it is not considered a “cost”. Value Boost well and truly witnessed
Bonus and Dividend: I completely fathom the impact of stock options and their extrinsic motivation in ensuring the executives work towards better shareholder value. Won’t the bonus cut it ? Well empirical evidence, I believe, suggests they don’t. But an yearly dividend from the stocks owned. How better are they than Bonus in reality ? Considering the tax implications on the employee’s aren’t they better off receiving cash instead ? Moreover as an employee having liquid cash is always preferable as you may ask any rational investor.
Are both the owners one and the same?: Well some invest money at a considerable cost of equity and the others, namely the employees with options, invest sweat. Comparable parameter indeed. But it gets murkier when you consider that the employees have better information than the investors. Whole principal of “Risk” to calculate cost of capital is questionable here give both are investing with completely different facts at their disposal. I love financial engineering for this part only. It is a tool used for the benefit of the organisation. Can a simple shareholder with 100 shares come and work for the company ? Try that out..
Well I would like to work and accumulate more data to validate this set of hypothesis. I am looking forward for someone to correct me if this is absolutely stupid. Would this change the whole investment world ? Of course not. Will this even matter in the near future, probably not. Why do it at all then ? Well in some organisation, employee stock options are even unto 7% of the total equity. I might be ill informed about the treatment of employee stock options and dividends they get, but little research and studies I carried out suggested otherwise.
It is just that I had a thought, and then I asked myself. What would I prefer if i were a top executive? Dividend or a Bonus ? Bonus, especially the freedom liquid cash gives me to choose where to invest my hard earned money. Well if I invest in my own company it is evident enough that I am doing something right for the true owners.
Unfortunately, Insider trading, I am told is frowned upon.