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.
- There are 2 identical companies: Company WagePayers and NonWagePayers (WP and nWP, respectively).
- The companies both have a dividend yield of 7%.
- nWP pays out all of its earnings in the form of dividends.
- nWP does *NOT* pay a wage to its employees.
- The employees at nWP own a lot of stocks, but they are not vested in these stocks. There is an infinity year vesting period.
- nWP is headquartered in a country which does not pay any taxes, and their employees are in the USA.
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
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
- is that the company has ,000 more earnings per employee. This creates about 0,000-0,000 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.
- 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?