The Best Way Companies Should Invest Their Tax Cuts

Orgionally Published On:  inc.com

Written By: Dr. Yoram Solomon

As companies pass the relief from the tax reform to their employees, will shareholder benefit too?

Walmart, AT&T, and Starbucks, to name a few, had already passed on the tax cuts to their employees, in the form of pay increases and bonuses. Here are 4 alternatives that companies have, and how to they effect their shareholders.

1. Raise employee pay or bonuses

Paying employees higher salaries doesn't have an immediate positive impact on shareholders. Yes, it will make for happier employees, and happier employees can improve customer service or production efficiency. However, over time, as more companies increase pay--it will stop becoming a differentiator, and simply set a new salary bar for all companies. Offering bonuses would not do that, but will also not provide shareholder value. Finally, there is no proof that financial incentives will increase creativity.

2. Buy back stock

When companies have extra cash, they often buy stock back from their shareholders. It offers shareholders better liquidity than the demand generated through the stock markets, but if shareholder were not planning to sell their holdings--they will not benefit from the buyback. Besides, stock buybacks typically take place when the stock price is low.

3. Spend it

Sometimes, when companies have extra cash, they would buy things they don't really need. From outrageously expensive buildings in prime locations, to increasing individual spending allowances. This spending will not generate any growth, and will typically require higher maintenance costs in the future, reducing future earning as well. Shareholder will not benefit from such spending.

4. Pay dividends to shareholders

While shareholders benefit from dividend, offering them would prevent the company from investing in anything else, from capacity to employees to research and development. No doubt that shareholders will enjoy the increased dividends due to a reduction in corporate tax, but over time those rates will become the benchmark. The benefit will be short-term.

5. Reinvest in the company

The best long-term benefit to shareholders will come if companies reinvest the increased profit due to lower taxes in building more capacity, develop new products or services, or any other activity that will increase the top line revenue in the long-term. Revenue growth, without significant operating expense growth will yield a much higher net profit increase, which shareholders can enjoy more than simply receiving increased dividends.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.