Suppose that there is a mature company which is growing at the rate of
WagePayers Company: 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 http://www.irs.gov/formspubs/article/0,,id 0856,00.html 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.
NonWagePayers Company: 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?