Share Buy Backs for Executive Compensation Purposes

[Markola]

I knew that these practices are related but I didn't realize until the following article how precisely-calibrated they are to each other. It's an understandable practice on one hand in a competitive talent market but, on the other, it makes the share prices and even market caps of our biggest companies seem like fluffy, somewhat manipulated numbers. Should we worry these manufactured chickens will come home to roost someday?

Schafer: Exposing shortcut many firms take to augment perceived value - StarTribune.com

Or try this link: http://www.startribune.com/lee-schaf...lue/387968932/

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[Sunset]

Simply put, share buybacks are a way to hide executive (CEO, etc) pay increases in the option section.

As a shareholder I want dividends (and then I can buy more shares if I want).

With Share buybacks, the millions of options granted to a CEO go up in value much faster than they would if dividends were paid out, as the CEO would not get dividends on the options.

[eytonxav]

Quote:

Originally Posted by Markola I knew that these practices are related but I didn't realize until the following article how precisely-calibrated they are to each other. It's an understandable practice on one hand in a competitive talent market but, on the other, it makes the share prices and even market caps of our biggest companies seem like fluffy, somewhat manipulated numbers. Should we worry these manufactured chickens will come home to roost someday? Sent from my iPad using Early Retirement Forum

I believe there was a Harvard study that attributed this form of compensation boosting as a cause for lower wage stagnation while the gouging takes place at the top.

[Danmar]

When I was working we did buy backs to stop dilution due to option awards. We weren't trying to hide anything. Option grants were expensed as awarded. Our major institutional investors were very much in favor of non dilution. Options have become a lesser proportion of total exec comp since the financial crises. Was great while it lasted.

I guess it is pretty easy and simple to attribute everything executives do as a "rip off" to somebody, but this certainly wasn't the case in the company that I worked for. We increased divs on a regular basis and dividends would have represented many multiples of any share repos.

[eytonxav]

Quote:

Originally Posted by DFW_M5 I believe there was a Harvard study that attributed this form of compensation boosting as a cause for lower wage stagnation while the gouging takes place at the top.

Well, it wasn't an actual Harvard study, but it did appear in the Harvard Business Review. The author is from UMass. It probably is written in a bit of a sensationalistic style, but he makes some points that are worth thinking about. Here is a link to the article if anyone is interested:

https://hbr.org/2014/09/profits-without-prosperity

[Mulligan]

Quote:

Originally Posted by Sunset Simply put, share buybacks are a way to hide executive (CEO, etc) pay increases in the option section. As a shareholder I want dividends (and then I can buy more shares if I want). With Share buybacks, the millions of options granted to a CEO go up in value much faster than they would if dividends were paid out, as the CEO would not get dividends on the options.

Isnt that the truth...I always read articles saying corporation is buying back stock...But they never mention that sometimes they still have more shares outstanding after the purchases... They never seem to emphasize that fact do they.


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[Totoro]

Doing buy backs to compensate for Executive pay is an idiotic reason.

Thankfully as I understood it this practice is being phased out. The days where options are not recognized as an expense are almost past (again, as I understand it) as well. I am against awarding options in general, I prefer stock awards with fairly long vesting and lockup periods instead.

Buybacks only make sense if your shares are under or fairly valued, and then I prefer them very much as a tool to return value to shareholders vs. dividends.

Reason being that buybacks are more tax efficient in my case. I pay withholding tax on foreign stocks (15% - 30% usually on all stocks not registered in the Netherlands) and in the future will likely pay a dividend income tax of 25% on top as well.

[eytonxav]

One aspect about buy backs, aside from option considerations, is that if a top exec has an objective tied to hitting a certain stock price, they may do a buy back to kick up the price to make their objective.