John,
You claim --
Let's go back to the "big if"
IF management is exercising fiduciary duty
THEN employees get less value from shareholders than the cash they forego
ELSE employees get more value than the cash they forego
No, this is not taken from the proper point of view. Fiduciary duty involves the duty of management to shareholders. Employees must look out for their own interest by either working for the company or going elsewhere.
IF management is exercising fiduciary duty,
THEN shareholders will benefit from the specific mix of cash and equity compensation chosen more than any other mix, allowing for an uncertain future AND the requirement that the particular mix also be acceptable to the employees.
ELSE some other mix of cash and equity compensation would both still be acceptable to employees and be more beneficial to shareholders.
Value cannot in general be reduced to dollars, and even if it could, a dollar is never worth the same to me as it is to you. All values are subjective.
Why would an employee be willing to forgo a specific amount of cash for a specific amount of equity compensation of some kind?
Partial list --
1. A belief that the stock received would be worth more in ten years than any alternative investment of the cash salary forgone.
2. Tax considerations -- salary received today may be largely taxed away at high marginal rates, while future stock may face lower capital gains rates and more flexibility in the timing of taxable events from realization.
3. Combination -- The forgone salary could only be used to buy stock after current taxes are taken out. Thus, if the stock is the investment of choice, more of it can be effectively purchased by the company grant than can be purchased on the market on an after tax basis.
Why would a shareholder be willing to give up equity in exchange for reduced cash salary expenses?
Partial list --
1. Exchange of risk -- By giving up a part of long term stock appreciation, downside risk is reduced due to reduced compensation expenses in the ongoing present.
2. As much as you might wish it otherwise, the actual profitability of the company is increased. This is not just an accounting artifact, but it is an actual competitive advantage that allows the company to price its products below that needed by competitors that cannot grant stock or options. Note that the pricing advantage is real, independent of the separate question of whether or not shareholders are helped or harmed by the specific grants chosen on a net basis.
Regards, Don |
