Why do some companies not pay out all profits?

Glen_Clark

bowlhead99 wrote: »

It is a sad day in the life of a company when the directors can find no better use for the funds than to give it back to the owners and tell the owners to spend it themselves or to invest it in someone else's company.
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Sadder still when the overpaid management start believing their own hype, waste it on over-expansion in a saturated market, over-paying for aquisitions, or ill judged ventures like BT Sport.:(

nrsql

Possibly their share price is supported by income investors so they set the dividend at the level to keep that price at the level they want?
Possibly a temporary increase in dividends would be followed by a large sell by controlling shareholders, drop then a hedge fund buyout and asset strip as soon as the cash reserves had been exhausted.
Or is that being cynical.

NewInvestor1

Thanks for the replies.

Another question is why do shareholders allow the CEOs to get paid so much?

I read the average FTSE 250 boss salary is £1.8m.

If I'm a shareholder, I would want to pay the boss say 100k plus a bonus. I don't like these ridiculous salaries.

eskbanker

The justification for high CEO pay is effectively self-perpetuating, i.e. that it's necessary to pay appealing salaries to prevent them from being attracted to competitors.

Well-remunerated chiefs have also undoubtedly suffered from being demonised as "fat cats" in the media, whose lazy characterisations usually ignore the pressures of high-profile roles leading well-known (and -scrutinised) organisations.

However, in the world of corporate pay, £100K really isn't a substantial salary, even if it sounds like it to (presumably) someone on significantly less, so the "pay peanuts, get monkeys" adage comes into play too....

DiggerUK

A very common reason for not paying all profits as dividend is so that the company can buy its own shares.
This bumps up the share price, and usually means that the fat cats in charge get even bigger bonuses. Don't forget, bonuses aren't just paid out on the basis of increased profits, but increased share price..._

HappyHarry

NewInvestor1 wrote: »

Thanks for the replies.

Another question is why do shareholders allow the CEOs to get paid so much?

I read the average FTSE 250 boss salary is £1.8m.

If I'm a shareholder, I would want to pay the boss say 100k plus a bonus. I don't like these ridiculous salaries.

If you want the best people, you need to offer them more remuneration than your competitors will. Else the best people will move to your competitors.

There will be thousands of people in Nike earning more than £100k per year. The CEO should be the top earner in the company, else why on Earth would they take on the role with the highest level of responsibility?

Shareholders can, and do, vote down high remuneration packages for board members. However, very few shareholders would think that paying a CEO £100k instead of £1.8m would benefit the company, and therefore the value of their shares, in the long term.

Alexland

NewInvestor1 wrote: »

If I'm a shareholder, I would want to pay the boss say 100k plus a bonus. I don't like these ridiculous salaries.

You would only get an in[FONT=&quot]experienced [/FONT]boss for that money which means you are taking higher risk with the business capital. The risk/reward profile of such an [FONT=&quot]approach [/FONT]would be very unattractive to most investors. Would you want a heart surgeon who had never even seen the operation performed? They would be cheaper but it's not worth the consequence of a bad outcome.

Alex

Nick_C

Some companies?

Most companies don't pay all their profits in dividends.

You will find exceptions.

Carillion were paying out high dividends that weren't covered by profits!

Maybe you can find a company like that to invest in!

OldMusicGuy

NewInvestor1 wrote: »

Another question is why do shareholders allow the CEOs to get paid so much?

I read the average FTSE 250 boss salary is £1.8m.

If I'm a shareholder, I would want to pay the boss say 100k plus a bonus. I don't like these ridiculous salaries.

I'm afraid you are way off in your understanding of the corporate world. 100K is peanuts, only the boss of a small private company would get something like that.

Why is their pay so high? A number of reasons:

- Most large companies get seduced by the lure of recruiting outsiders into senior management positions. Instead of promoting able people from within (which would cost more than 100K but would be cheaper than going outside), they like to recruit "superstar" CEO outsiders. I have worked closely with a number of CEOs in the tech industry and some (very few) are worth their money, but most aren't. It's like the manager-go-round in English football - the same crummy managers get recruited on big bucks just because they previously managed a not that successful team in the Premier League.

- Increasing pay transparency for CEOs (which was generally intended to keep pay down) has caused it to go up. There's been various research the shows once CEO salaries are disclosed, other CEOs realise they are not being paid as much and therefore push for salary increases. And they will use the argument "you have to pay what the market demands" to support that. Add to that that the headhunting agencies that most companies use when they go outside to look for a CEO will support higher salaries because they get a bigger commission.

- Pay for CEOs is generally set by people who move in those circles so would (like I did) laugh when someone suggests 100K as a salary for a CEO. That may seem lot a lot of money to many people, but to the senior corporate world that is probably just one year's worth of expense claims.

- Finally, the job of a CEO is extremely demanding. So there is a good argument for a high salary, but IMO executive pay has got completely out of control for the reasons stated above.

There has been some shareholder activism against high CEO pay but most shareholders just want a short term return. As long as the share price is going up and maybe dividends are being paid, they are happy. It takes a lot of effort to get enough shareholders to overturn compensation committee recommendations. There have been some examples in recent years, but not many.