Dividend equivalents: Overview, definition, and example
What are dividend equivalents?
Dividend equivalents refer to payments or credits made to holders of certain equity awards, such as stock options, restricted stock units (RSUs), or performance shares, to provide them with a benefit equivalent to the dividends paid on the underlying stock. These payments are usually calculated based on the dividends declared on the company’s stock and are designed to ensure that equity award holders are not disadvantaged compared to regular shareholders.
For example, if a company declares a $2 per share dividend and an employee holds 1,000 RSUs with a dividend equivalent provision, the employee may receive $2,000 as a dividend equivalent payment.
Why are dividend equivalents important?
Dividend equivalents are important because they provide equity award holders with a financial benefit comparable to shareholders, fostering fairness and incentivizing long-term participation in the company’s growth. For SMBs and other companies, including dividend equivalents in equity award agreements helps attract and retain talent by aligning employee interests with those of shareholders.
These provisions also ensure clarity regarding how and when dividend equivalents are calculated, credited, or paid, reducing the risk of disputes.
Understanding dividend equivalents through an example
Imagine an employee is granted 5,000 RSUs by their employer. The RSU agreement includes a dividend equivalent clause, stating that the employee will receive cash payments equal to the dividends paid on the company’s stock until the RSUs vest. If the company declares a $1 per share dividend while the RSUs are unvested, the employee receives $5,000 in dividend equivalents.
In another scenario, a board member is granted stock options with dividend equivalents. The agreement specifies that the dividend equivalents will be credited to an account and paid out only if the stock options are exercised. This aligns the board member’s benefits with the company’s performance and stockholder returns.
An example of a dividend equivalents clause
Here’s how a dividend equivalents clause might appear in an agreement:
“Holders of Restricted Stock Units (RSUs) granted under this Plan shall be entitled to receive dividend equivalents in the form of cash or additional RSUs, as determined by the Company. Dividend equivalents shall be calculated based on the dividends declared on the Company’s common stock and shall accrue until the RSUs vest. Payment of dividend equivalents shall be made in accordance with the vesting schedule of the underlying RSUs.”
Conclusion
Dividend equivalents provide equity award holders with benefits comparable to dividends received by shareholders, aligning their interests with the company’s growth and shareholder returns. For SMBs, including dividend equivalents in equity award agreements helps attract and retain top talent while fostering transparency and fairness. A well-drafted dividend equivalents clause ensures clarity on how these payments are calculated, credited, and distributed, reducing the risk of misunderstandings or disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.