Preferred Stock Awards: A Novel Idea for Manager Compensation

Abstract

Congress should allow a unique class of preferred shares whose dividends are tax-deductible as long as a significant majority of senior management compensation is in the form of these shares. Tax-deductible interest should be further limited to compel firms to issue these shares because a lower tax liability will increase firm value. Managers will be discouraged from making high-variance and often losing bets with other peoples’ money because they will have skin in the game. Their compensation will be directly tied to corporate performance rather than the volatility of the stock market, which is the case with common stock and options awards.