What's really driving new dividend programs?

NEW YORK (AP) -- Executives might have a roundabout way to give themselves a big pay raise. And it could come under the guise of helping shareholders.

The prolonged slump in the stock market as well as the proposed dividend tax cut could spur companies to start issuing dividends, which investors like because of the guaranteed and possibly tax-free returns.

But there would be profits, too -- millions of dollars a year in some cases -- for top managers who own bundles of company stock.

There is only one condition: The executives have to keep their businesses healthy so they can afford to pay the promised dividends. As long as they do, the money is theirs.

''This could be an indirect form of compensation,'' said Patrick McGurn, director of corporate programs at Institutional Shareholder Services in Rockville, Md. ''It could come at a time when there is pressure on companies to link pay to performance.''

With at least a partial, if not total dividend tax cut expected to be passed by Congress, there has been talk in recent weeks about the anticipated push by cash-rich companies to start issuing dividends.

Topping the list of possibilities are technology companies, including Dell, eBay and Oracle, that have favored reinvesting their profits into their businesses. But after three years of stock market declines, they may be tempted to go the dividend route to please investors.

These companies happen to have a good portion of their stock ownership concentrated among the top managers and directors. So if their companies start issuing dividends, they benefit greatly.

Just look at the $99 million that Microsoft chairman Bill Gates takes away from his company's decision last week to pay its first dividend of 16 cents a share.

Microsoft CEO Steve Ballmer gets $37 million, and the other 27 executive officers and directors take in about $7 million in total, according to their stock holdings on the company's most recent proxy statement. Compare that with a Microsoft investor with 1,000 shares who will now see $160 in dividend payments.

That's not to say that Microsoft's leaders had put their own interests first when making the historic decision to pay dividends.

But it doesn't mean that other executives won't.

As a result of the recent rash of corporate scandals and the severe business slump over the last few years, management paychecks and bonuses are under intense scrutiny from investors.

Add to that a depressed stock market, which makes their holdings worth far less, at least on paper. And even if they wanted to sell some of their shares, investors analyze their every trade.

Also enticing is the possibility that dividend payments may soon become tax free. Compare that to the capital gains taxes they have to pay on profits made from the sale of their stock holdings.

Still, though, it may be tricky to tell whose interests -- executives or shareholders -- propel a company to launch a dividend program. Chances are that most top managers won't acknowledge that their own potential gain played a part.

And while dividend payments for all shareholders must be approved by the board of directors, there is no real regulation beyond that.

In fact, what executives take home in dividend income doesn't have to be included in a company's financial statements, though an investor could figure out the approximate payments based on public regulatory filings that give executives' stock holdings.

''There is no disclosure on personal dividend payments because they aren't considered compensation, but investment income,'' said Fred Shapss, managing partner at the New York accounting firm of Rosen Seymour Shapss Martin & Co.

Nevertheless, shareholders have the ultimate protection against excessive dividends being paid purely out of management greed. The same executives who would enjoy the dividends must be disciplined about making money and growing the business to pay for them.

''Cash is king and you still need earnings to have the cash,'' said Charles Elson, director of the Weinberg Center for Corporate Governance at University of Delaware. ''If there is no money in the company to pay the dividend, no one gets paid.''

There are sound reasons for paying dividends. Greed doesn't have to be one of them.

------

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org