Imagine a time in the future in which you are well into a pretty good career. Among other things at this future time, you find yourself serving on the budget committee of a medium-sized corporation. It is a seven member committee. On many issues, the seven of you take unanimous action. But, on one specific type of issue - new spending - the other six members tend to split 3-3, leaving your vote as the key vote in gathering a majority. More on that in a moment. First, two facts about your company:
Fact 1: dividends, or direct payments to shareholders, have been steady for a long time at $2 per share. And so, if John Smith has a single share of your company in his E*Trade account, he gets two bucks. If Jane Doe owns 1000 shares, she gets a $2000 dividend payment every year. And so on.
Fact 2: The year that is just ending has brought unexpectedly large profits, and the higher profits are expected to continue. Specifically, the company's bottom line has grown by $100,000,000 this year.
The corporation's CEO has asked the budget committee to consider five new spending items which would account for 40% of the "new" $100,000,000 that is available this year. She proposes to spend a total of $40,000,000 on five specific things. Here are the five proposed items which the committee will have to approve or reject:
- Fund a 6% raise for all employees in the firm. Cost: $12,500,000.
- Fund an additional 6% raise (for a total of 12%) for "key employees" who have driven profits in defined ways. These workers are mostly executives, scientists, and top salespeople. Cost: $2,500,000.
- Fund a modernization of your factories that will reduce emissions. The changes would go beyond what is required by environmental laws. Cost: $20,000,000.
- Expand funding for a "community support fund" that the company has used for many years to benefit local charities in the cities in which it operates. Cost: $2,500,000.
- Increase the company's donation to a national social justice organization that the company has supported at a lower level for the past two years. Cost: $2,500,000.
So, your decision is whether to approve some or all of the above five items. Any unspent "new money" will probably be added to shareholders' dividend payments by your company's board of directors. If all five of the new proposals are approved, and if the rest of the new $100,000,000 is allocated to expanded dividend payments, shareholders will get $2.40 per share this year. If you reject all five proposals, and the board commits all of the "new" money to dividend payments, shareholders will get $3.00 per share this year. If some proposals are approved and some are rejected, shareholders will receive somewhere in between those amounts.
Evaluate all five of the proposals outlined above. Would you vote to approve or reject each one? Why?