It's far more profitable for a corporation to pay their employee in
the form of dividends than it is to pay them in the form of wages.
Suppose that there is a mature company which is growing at the rate of
inflation, and its earnings are steady-state. Let's make this problem
as simple as we can.
1. There are 2 identical companies: Company WagePayers and
NonWagePayers (WP and nWP, respectively).
2. The companies both have a dividend yield of 7%.
3. nWP pays out all of its earnings in the form of dividends.
4. nWP does *NOT*
pay a wage to its employees.
5. The employees at nWP own a lot of stocks, but they are not vested
in these stocks. There is an infinity year vesting period.
6. nWP is headquartered in a country which does not pay any taxes,
and their employees are in the USA.
Suppose that in WP pays their employee $60,000/year. The after tax
wage is actually $48,442.50, since the taxes is $4220 + 25% of any
amounts over $30,650. This information comes from
This effective rate is 19.2625%. Also, the earnings of the
corporation goes down by $60,000 since this amount is deducted from
sales, COGS, etc. Wages are, after all, an expense.
nWP, on the other hand, has an astute CFO. They decide that, since
the dividend tax rates is only 5%, and hence, are much less (http://
taxes.about.com/od/taxglossary/g/dividends.htm ) for these employees
who don't make any salary in the technical sense of the definition.
This company figures that they still want their employees to have as
much purchasing power as someone working at WP. The employee at WP
earns $48,442.50 a year after taxes. The CFO of nWP realizes that a
yearly dividend of $50,992.11 taxed at 5% nets exactly $48,442.50.
Moreover, he realizes that his stocks are paying out about 7% in the
form of dividends. He figures out that every worker should have
$728,458.71 of the stock (since $728,458.71* 7% = $50,992.11, and this
after-tax is $48,442.50).
This CFO decides to allow the employees to own $728,459 of the stock,
but the vesting schedule is infinity years.
The net benefit of this alternative way of compensation
1. is that the company has $60,000 more earnings per employee. This
creates about $720,000-$900,000 of wealth given that the P/E ratio of
a mature company is about 12x-15x. The earnings increase translates to
a 12x-15x increase the valuation of the company.
2. The employee makes the same amount in both situations, after tax.
This isn't a benefit, but it's not a net loss.
What are your thoughts/opinions of my analysis?