MC- “The point I make and that you obviously dont grasp, is that if the primary motivation of your management is through the increase in the company’s stock price, the probability that a disproportionate amoutn of effort will be put into trying to juice the stock price is very high.”

DE- That will always be the primary motivation for 80% of public execs, no matter if you pay dividends as incentive or not. They talk about it openly on con calls to analysts, and their shareholders in shareholder meetings. Right or wrong, it is accepted that this is the strategy that makes everyone the most money. Do I think it’s wrong? Sure. I think a company should be growing themselves internally and closing their eyes to a stock price. If more time were spent managing the company, and less time spent managing stock price then lo and behold, those companies stock prices just might fare better. We agree, and I didn’t miss your point. I agree that the probability is higher, but then again as you mentioned several times, the option is there to not pay dividends, and chase capital appreciation anyway. As you stated the boards would have to decide which way to go, and I’m guessing the better choice of dividends (if available) still wouldn’t make the final cut. I’ll tell you why the motivation for short term market manipulation got big, and it’s not entirely why you think. It’s the damn media, and their hands on approach to the market analysts. Analysts for the majority of the big firms beat the mess daily out of C level execs when it comes to stock price. Why? Their firms are the biggest investors. Not because they want to show Sally and Joe why this is or isn’t a good stock, but because their firms own or have an interest in a ton of shares, and need the stock to go up. The media (CNBC et al) is all to willing to cover this spectacle on a daily basis, with all the sheep sitting in their living rooms nodding their heads. I don’t blame the sheep, I blame the media, sheep will be sheep, and that’s never going to change. The media has decided it’s great to cover these asshat analysts running around beating the mess out of C levels. Hell they have practically made a sport of it. Violence sells, and this is the closest thing to violence that armchair “wallstreeters” get.

That’s the majority reason for the efforts of short term stock gain. You cut that dog and pony show, you can get back to the roots. Then your dividend payments make sense.

You want some interesting juice for sharesleuth? Tie the stock anaylsts into the research Mr. Carey conducts. Look at each and every one of them, starting with the Dow stocks. I guarantee you will find as much dirt there as there is in the board rooms.

That’s not to say that there isn’t greed for the pure gain. It’s obviously alive and well, but at the very least it’s a two headed monster.

MC- Risks abound everywhere. had the stockmarket not gone crazy, most of the employees of broadcast.com would be working there for the salaries they earn, like those people who work for the millions upon millions of private companies who compete for employees every day.
Which leads to another point you miss. The 10k public companies are far from being the best companies. they just happen to be public, and nothing more. They attract and retain employees and compete against public companies every single day. So my proposal for a tracking stock may actually help boards weed out the shortsighted, hit and run execs that are creating the executive pay disparities we see today.

DE- No one said public companies are the best companies. BUT, they are where the fresh talent goes to. Not the only talent, not the best talent, but the most talent. The talent coming out of your top B schools is doing one of three things today:

1. Trying to start their own business.
2. Joining Big 4, Booz, Bain, McKinsey, Accenture or any other consulting firm that can get them.
3. Negotiating the highest salary they can at public companies with the “big names”.

That’s at least 70% if not much more of the talent leaving B schools today. Private companies get some, but not much of the talent. This is a generality; you may have succeeded at a higher rate. If I were leaving B school today, I would be happy to work at a company you own, in fact most kids would. It wouldn’t be to get a decent salary though, it would be to learn and take that knowledge somewhere I could make real money, unless you recognized my talent first. Or unless I thought you had a chance to go public.

Either of those options rarely happens. Most management doesn’t recognize the talent they have and most private companies don’t go public. So… I’d be off to the land of milk and honey. (I’m speaking in generalities here). You may recognize and retain the talent you have at the companies you run, I don’t know.

I knew you put more thought into it then what you typed. I just wanted to see it.

For the most part we absolutely agree. Only thing is I can’t help but think that there are a lot of private companies that take unnecessary risks with capital, the biggest one I can think of is Trump with his boom or bust mentality. It doesn’t affect shareholders, but it damn sure affects employees.

For public companies, what do you think about EVA and its derivatives? It lets the CEO get rewarded for investing correctly in the business, as well as for a sale or dividend.

No high paid CEO has been worth the money according to research. High or low, salaries had nothing to do with performance, and more high paid CEOs did not lead their companies to perform greater than the market than did.

How is holding the stock of a company with a buyback plan different from holding the stock of a company that pays dividends, then reinvesting your dividends?

Another way to handle the exec. compensation thing: your options vest on your hire date and expire the same day, so you have to buy in. The company will loan you the money needed to exercise the options, but you’re only allowed to sell a small fraction of the stock per year as long as you work there.

I think that a cash bonus bank based on some measure of performance like EVA is the best one size fits all solution available. However, stock options may still be a good solution for some firms and the phantom bonus is an interesting idea that may be worth looking into for some of the more mature firms.

Even a mature industry (where the value is primarily producing dividends, not planning for the future) needs to maintain that investment in the future.

Interesting ideas as always, but I think this one needs to be refined a bit to make it work.

Clarity and simplicity will go hand in hand on this issue. Let’s cut out (through the tax code) the plethora of long term incentive plans, executive pension plans, perquisities (i.e., plane travel, country clubs, car allowances, etc) not available to ordinary employees … note that this mechanism already exists for 401-K plans.

If there are only three ways to make money off of the comapny – 1) current period salary and bonus, 2) savings plan (401-K or pension) and 3) options / phantom stock – then you’ll actually be able to figure out how much is getting paid out.

BTW, your plan would actually encourage the long-term, value-creating employee with a reasonable cash income to quit. How am I supposed to put my kids through college? Granted, that issue isn’t the ‘excesses’ you are worried about but, since these things flow downhill, is actually the more common situation in the long run.

dg

PS: Please go talk to your tax advisor. Unless you’ve moved to Hong Kong, you really do care about the difference between ordinary income and capital gains.

1. Companies in a finiancial mess won’t pay out or they or cancel didvend payments if they are already paying them. These are the comapnies that often times turn over management that could not get the job done. What does this mean? They have to attract new talent. Under your system the way to attract that talent is to pay a healthy dividend, more than your competitor. Not feasible when you have financial difficulties. Theefore the companies that need the talented execs the most, get the short end of the stick. There goes your turnaround pros that come to fix a company as well.

Side point, BCST had a 98 Q4 loss of $5.18 million. Could you have afforded to pay a dividend? Should you have to worry about your management seeking jobs to your competitors because they could have (assume they could)? Let’s say that Real Networks could have paid a dividend. Your top talent just left Broadcast.com. Out the door to RNWK where they will be compansated each quarter. Say what you want about them jumping ship, and all the drama about being a visionary and your ability to retain them. The reality is you coudln’t have, and your business would have suffered HUGE. In that competitive of an arena, you might as well have kissed your ass goodbye, if you aren’t acquired.
2. If you are in the business of innovation, ie GOOG, YHOO,(BCST back in the day) what makes more sense? Pay out sorely needed R&D money, or payout shareholders? If you start paying out divs, you could very easily lose the innovative edge because you have no free capital to work with. Their cash is better spent innovating products and keeping ahead of the game.

3. Some companies actually do a good job of reinvesting earnings, and turning that into real profit. I suggest you read Berkshire Hathaways’s owners manual.

Here’s a quote from Buffet when asked about the policy of dividend payments at Berkshire:

“We will either pay large dividends or none at all if we can’t obtain more money through re-investment (of those funds). There is no logic to regularly paying out 10% or 20% of earnings as dividends every year.”

Not that I don’t applaud the thought behind the idea, but I can tell there wasn’t much thought (or the right thought) put into it.