[tgma]

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).

[lotsofpulp]

> 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]

> 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.

[jldugger]

I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.

[tgma]

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]

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]

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).