Editor: Vladimir Bajic | Tactical Investor
Executive Compensation & Greed
Take a look at the chart below, the data is quite revealing and it also indicates why CEO’s are raking in huge amounts of money at the expense of the average American worker.
Executive Compensation Driving Share Buyback Programs
The eighties brought us permed bangs, acid wash jeans, and Gordon Gecko’s “greed is good” mantra. So it’s not surprising that in 1982, among other bad ideas, the Securities and Exchange Commission put into effect something called Rule 10b-18, which granted a “safe harbour” (read: free pass) to company executives who wanted to buy back their own stock to raise its price. The SEC promised it would no longer accuse executives who bought back their own stock of market manipulation, rewarding corporate greed.
What exactly is a stock buyback? Stock “buybacks” are when companies buy back their own stock from shareholders on the open market. When a share of stock is bought back, the company reduces the number of shares left in the market, which raises the price of remaining shares.
Company executives have every incentive to buy back stocks, since most of their compensation today is paid in the form of stock, and a higher stock price makes them personally richer. Executives push companies to buy back billions of dollars of their own stock, juice share prices and pass on cash to themselves and wealthy shareholders. (If you’re curious about the mechanics, check out this short visualization of how it works, or Rep. Alexandria Ocasio-Cortez’s explainer at a recent House hearing.)
Over the last 15 years, 94 per cent of corporate profits have gone to shareholders in the form of buybacks and dividends, instead of to workers and their families. Full Story
Executive Compensation Tied To Share Repurchase programs
The monster of economic waste—over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations—started with a little-noticed change in 1982 by the Securities and Exchange Commission (SEC) under President Ronald Reagan. That was when SEC Chairman John Shad, a former Wall Street CEO, redefined unlawful ‘stock manipulation’ to exclude stock buybacks.
Then after Clinton pushed through congress a $1 million cap on CEO pay that could be deductible, CEO compensation consultants wanted much of CEO pay to reflect the price of the company’s stock. The stock buyback mania was unleashed. Its core was not to benefit shareholders (other than perhaps hedge fund speculators) by improving the earnings per share ratio. Its real motivation was to increase CEO pay no matter how badly such burning out of shareholder dollars hurt the company, its workers and the overall pace of economic growth. In a massive conflict of interest between greedy top corporate executives and their own company, CEO-driven stock buybacks extract capital from corporations instead of contributing capital for corporate needs, as the capitalist theory would dictate.
Yes, due to the malicious, toady SEC “business judgement” rule, CEOs can take trillions of dollars away from productive pursuits without even having to ask the companies’ owners—the shareholders—for approval. Full Story
Executives cashing on Share buyback programs
Wall Street loves that. It signals that CEOs believe their shares are cheap, and stocks typically spike after buybacks are announced.
Yet an SEC official has uncovered what he calls a disturbing trend: In the days after executives unveil buybacks, they quietly cash out their own shares.
An analysis released Monday by SEC Commissioner Robert Jackson Jr. found that the percentage of insiders selling stock more than doubled immediately after buyback announcements.
And the amount of stock being unloaded is not trivial. Daily stock sales spiked from an average of $100,000 to more than $500,000 per executive, researchers found.
“Right after the company tells the market that the stock is cheap,” Jackson said in a speech on Monday, “executives overwhelmingly decide it’s time to sell.”
The report studied 385 buybacks in 2017 and during the first three months of 2018. Thanks to the reliable stock bounce, insiders gained a total of $75.1 million on their stock sales, the SEC researchers calculated. Full Story
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One way to deal with faulty distribution of wealth would be to tax the excessive “golden parachute” compensation of company executives at 95% rate. But this would be very difficult to achieve. Defining what is excessive would be tricky, but when we consider which party would be totally against such a thing we know it would definitely be the Republicans. They would scream “socialism” until their voices could be heard on the far side of the moon.