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The past two decades have shown a pattern which leads to compensating executives at the expense of shareholders. That pattern includes decreasing dividends relative to earnings while increasing stock option grants.

Decreasing Dividends

Shareholders have seen diminishing compensation, in the form of dividends, relative to earnings. The dividend payout ratio (dividends per share/earnings per share) is the gauge of this. For example, in 1960, 63.9% of S&P 500 earnings were paid out to shareholders in the form of dividends. By 1990, that dividend payout ratio was 54.5% and began to fall sharply hitting 27.6% in 2010.

Stock Option and Restricted Stock Grants

Many public executives are given pay packages which consist largely of stock options or restricted stock. Apple (NASDAQ:AAPL), for instance, granted $400 million in restricted stock this year alone. When an option is exercised, it increases the number shares outstanding and thus decreases the percent of future earnings each shareholder is entitled. Many option grants are exercised using a cashless route increasing individual yearly income without an incentive to hold those shares. Why not just offer an increased bonus in the form of cash if the goal is increased income? Three of the top Oracle (NYSE:ORCL) executives that exercised options for 2011 had combined salaries of 24.6 million dollars. Their combined exercised options had a value of 58.0 million. Under the current predicament, those three individuals do not likely have the ability or desire to take a long position of that amount. Substantial stock option granting like the situation with the Oracle executives is an accepted practice in the stock market. Yes, the company can pay top talent at top compensation rates, but at whose expense?

A movement towards higher dividends and less dilution

As a company becomes more certain about future earnings, the dividend is increased and thus shareholders are rewarded. A healthy dividend would make an executive more prone to holding any rewarded shares and thus increase future compensation. Granting restricted shares relative to stock options, which require funds available, would also add to the likelihood that a position would be held.

A dividend payout ratio close to 50% is optimal: A "Goldie Locks" Parable

As the trend towards lower dividends widens, some companies are offering dividends on the higher end to attract investors. While an investor may be lured in by an inflated dividend, too high a ratio may be deceiving of the longer term viability of return. Paying a dividend greater than earnings is unsustainable and usually means the company is in some sort of distress. Having too high a dividend may be a sign of false optimism just as having too low a dividend is not equitable to the shareholder. So what should a savvy investor look for? A 50% ratio and a history of increasing dividends with earnings is a sign that things are just about right, echoing the children’s parable Goldie Locks and the Three Bears. The bottom line for investors on a moderately low dividend is to investigate a company’s executive compensation packages relative to its earnings. An investor needs to ensure the companies invested in are not giving their executives an inequitable reward at the expense of shareholder dilution.

S&P 500 companies, their dividends, and dividend payout ratios:

Company

Market Cap (billion)

EPS

Dividend

Dividend Yield

Payout Ratio

Exxon Mobil (NYSE:XOM)

373

8.28

1.88

2.4%

22.7%

Apple (AAPL)

348

27.68

0

0%

0%

Int’l Business Mach (NYSE:IBM)

218

12.69

3.00

1.6%

23.6%

Microsoft (NASDAQ:MSFT)

212

2.75

0.80

3.2%

29.1%

Wal-Mart Stores (NYSE:WMT)

197

4.72

1.46

2.60%

31%

Chevron Corp. (NYSE:CVX)

194

13.50

3.24

3.30%

24%

Google Inc. (NASDAQ:GOOG)

192

29.34

0

0%

0%

Johnson & Johnson (NYSE:JNJ)

174

4.1

2.28

3.6%

56%

Procter & Gamble (NYSE:PG)

173

3.94

2.10

3.30%

53%

AT&T Inc. (NYSE:T)

169

1.97

1.72

6.0%

87%

General Electric (NYSE:GE)

165

1.31

0.60

3.8%

46%

Oracle Corp. (ORCL)

154

1.76

0.24

0.80%

14%

Coca-Cola Co. (NYSE:KO)

153

5.44

1.88

2.8%

35%

Pfizer Inc. (NYSE:PFE)

150

1.44

0.80

4.10%

56%

Wells Fargo & Co. (NYSE:WFC)

130

2.70

0.48

1.90%

18%

Intel Corp. (NASDAQ:INTC)

123

2.31

0.84

3.5%

36%

JPMorgan Chase (NYSE:JPM)

116

4.69

1.00

3.30%

21%

Merck & Co. (NYSE:MRK)

106

1.37

1.52

4.3%

111%

Cisco Systems (NASDAQ:CSCO)

99

1.16

0.24

1.3%

21%

What you can do as a shareholder?

Investors should be more active in electing board members who advocate an equitable wealth sharing plan. Show up to annual meetings; protest your dissatisfaction when insiders are compensated at a greater rate than shareholders. Investors have shareholder rights but without collaborative efforts, the voting power is miniscule and those go unheard. Instead of occupying a park as those dissatisfied with our financial system are currently doing, more investors should group, go to annual meetings, and work to elect board members that advocate equality between shareholder and executive rights.

Source: While Others Are Occupying Wall Street...Investors Should Be Watching Executive Compensation