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Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to ot

Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).

10u152 3y ago
There isn’t any. The poster above you is incorrect.
blackeyeblitzar 3y ago
It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.
- lotsofpulp 3y ago
  Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in. An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.
tgma 3y ago
The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).
- jldugger 3y ago
  I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.
  - tgma 3y ago
    When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)
    - jldugger 3y ago
      I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).
      - tgma 3y ago
        I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).
- lotsofpulp 3y ago
  > thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation) This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow. The two effects should cancel each other out.
  - tgma 3y ago
    > not having to pay the employees more cash I acknowledge there is an effect on employee compensation. How it actually plays out is not a simple linear one though (esp. since the comp decision is made at grant time and the impact is seen a while later with different assumptions). The induced incentives and behavior can be different depending on the model chosen. > The two effects should cancel each other out. Not sure the math is as clear cut as canceling each other. Maybe. Probably not.

Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).

10u152 3y ago

There isn’t any. The poster above you is incorrect.

blackeyeblitzar 3y ago

It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.

lotsofpulp 3y ago
Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in. An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.

tgma 3y ago

The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).

jldugger 3y ago
I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.
- tgma 3y ago
  When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)
  - jldugger 3y ago
    I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).
    - tgma 3y ago
      I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).
lotsofpulp 3y ago
> thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation) This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow. The two effects should cancel each other out.
- tgma 3y ago
  > not having to pay the employees more cash I acknowledge there is an effect on employee compensation. How it actually plays out is not a simple linear one though (esp. since the comp decision is made at grant time and the impact is seen a while later with different assumptions). The induced incentives and behavior can be different depending on the model chosen. > The two effects should cancel each other out. Not sure the math is as clear cut as canceling each other. Maybe. Probably not.