Why Aviva executives earn dividends on shares they don’t own

In 2021, the share award made to Amanda Blanc, the chief executive of Aviva (AV.) was worth £3mn. That was three times her salary. When the six performance conditions were assessed at the end of 2023, she received 91.8 per cent of the awarded shares. This reduced the value of the original award to £2.75mn. Yet the annual report showed that she was due to receive £3.48mn. Why was this?

Had the share price risen? Yes, but not by that much. That increase brought the value of the award up to £2.88mn. The missing £0.6mn came from extra shares added to the original award, equivalent to the value of the dividends paid to shareholders during the performance period, which increased the value by over a fifth. There was a similar pattern for her 2022 awards that vested this year. Using actual, rather than estimated, share prices for each award, these ‘dividend’ shares together were worth £1.5mn.

Many companies follow a similar policy, but the outcome for Aviva is more marked than for most because of its particularly generous dividend – despite recent share price gains, the group’s broker consensus forward yield is still about 6.4 per cent.

On the face of it, the concept of adding dividend shares seems odd. Aviva refers to its executive share awards as conditional. Participants will not receive the shares until three years after the award was made – when the outcome of the performance conditions determines not just how many shares they’ll receive but also how much income tax they’ll have to pay. During the performance period, they don’t actually own the shares. If they did, they’d be taxed on them earlier. Why, then, should they receive dividends on shares they don’t own?

The plot thickens with nil-cost options. That’s how many companies (including Aviva) make share awards. Options add flexibility. They enable participants to choose whether or not to take the shares. Since by definition nil-cost options cost the participants nothing, the decision’s a no-brainer. It’s less academic for market-based options, where the shares have to be bought, hopefully at a discounted price. That’s how all-employee share option schemes work – Aviva says that over 60 per cent of its employees participate in their savings-related scheme. Again, until the option is exercised, the participant does not own the shares. Employees don’t receive dividends on their options. Executives do on theirs.

There are, of course, counter-arguments. One reason for paying executives in shares is to place them in the same position as shareholders. Investors acquiring the shares on the date of the share award and holding them for three years would receive dividends, so to replicate that, executives need to receive them as well.

Another view is that unless they’re compensated for missing out on dividends, executives may be more inclined to advocate buying back the company shares instead, in the hope of enhancing earnings per share and so supporting the share price. Against that, there’s the practice of requiring executives to own company shares worth a multiple of their salary. Blanc is expected to own Aviva shares worth three times hers. Her current holding is double that. She owns even more shares held back from her annual bonus. They can’t be sold for two years. Her dividend income appears to be well over £3mn a year. Where executives become such significant private investors in their own right, nobody could claim that their interests are not aligned with other shareholders.

Another anomaly relating to dividend shares is the way that potential earnings are shown in annual reports. These illustrate four standard scenarios: 1) salary and benefits only; 2) target performance achieved; and 3) the maximum for outstanding performance. This last scenario assumes that all the awarded shares will vest but that the share price stays static. That seems unrealistic, so the fourth considers the impact if the share price rose by 50 per cent. Dividend shares are ignored – to include them would require assumptions about future dividends. In the 2021 annual report, anticipating the 2022 share award, the third scenario suggested that Blanc’s total 2024 earnings would be £6.9mn. The fourth scenario had them rising to £8.7mn. Had dividend shares been included, they would have been £10mn.

We now know that Blanc received just over three-quarters of those 2022 shares and that the share price rose by 30 per cent. That adjusted her total figure of remuneration to £7.8mn in 2024. This included additional shares for the six dividends paid to shareholders during the performance period, worth 18 per cent of the share price when the award was made.

Aviva is far from alone in awarding dividend-equivalent shares. It’s common practice. They’re something to bear in mind when looking at the illustrations of executive directors’ potential earnings in annual reports.