How do notional dividends work with deferred equity plans?

Some companies allocate ‘notional dividends’ as part of their share plans and other’s don’t. When performing a valuation on unvested deferred compensation this is often overlooked. However it can have a substantial impact. With no appreciation in the stock price a 200k award with a 5 year vest in a company that has a 5% dividend would be worth $255k upon vesting vs $200k if no notional dividends are accrued.

Companies who do award notional dividends will typically automatically process small grants annually that are added to the employees account. Their vesting schedule will be aligned to the bigger award. You can usually log in to your account and see these additional units on a separate line item.

Notional dividends are a great benefit for employees. No-one likes waiting for their stocks to vest but if that long term award can be earning 3/4/5% in dividends while you wait then it makes it that little bit less frustrating than having money tied up and not necessarily ‘earning’. At Sharpe Valuation if you provide the dividend details then we will certainly include that it any long-term incentive valuation we perform. Feel free to try it yourself by using our free report.

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