The American Bear

Sunshine/Lollipops

How High CEO Pay Hurts the 99 Percent | William Lazonick

"Make no mistake about it. Executive pay is a prime reason why in 2005-2008 the top 0.1 percent captured a record 11.4 percent of all household income (including capital gains) in the U.S., compared with 2.6 percent three decades earlier. In 2010 (the latest Internal Revenue Service data available), this number was 9.5 percent. The income threshold among taxpayers for being included in the 0.1 percent in 2010 was $1,492,175. Of the executives named in proxy statements in 2010, 4,743 had total compensation greater than this threshold amount, with a mean income of $5,034,000 and gains from exercising stock options representing 26 percent of their combined compensation.”

The speculation-fueled “irrational exuberance” of the late 1990s brought unprecedented pay bonanzas to top executives, thus establishing a “new normal” for corporate greed. When boom turned to bust in the early 2000s, money-hungry executives had to look for another way to get stock prices up and make their millions. Their favorite “weapon of value extraction” over the past decade has been the stock buyback (aka stock repurchase). Top executives allocate massive sums of corporate cash to repurchasing their company’s own stock with the purpose of boosting their company’s stock price. Stock buybacks and stock options have become the yin and yang of executive compensation.

Let’s take a look at how it works: The board of directors of Acme Corporation authorizes the CEO to repurchase the company’s own outstanding shares up to a specified value (say $5 billion) over a specified period of time (say three years). On any dates within this three-year period, the CEO then has the authority to instruct the company’s broker to use the company’s cash to buy back shares on the open market up to the $5 billion limit and subject to the SEC rule that the buybacks on any one day can be no more than 25 percent of the company’s average daily trading volume over the previous four weeks. That might permit Acme to do buybacks worth, say, $100 million per day. It may be the end of the quarter, and the CEO and CFO want to meet Wall Street’s expectations for earnings per share. Or they may want to offset a fall in the company’s stock price because of bad news. Or they may want to ensure that the increase in the company’s stock price keeps up with those of competitors, who may also be doing buybacks. Whatever the reason, by the laws of supply and demand, when the corporation spends cash on buybacks, it “manufactures” an increase in its stock price.

Then, with the stock price up, the CEO, CFO and other insiders may choose to cash in their stock options. Presto! They make tons of money for themselves.

Meanwhile, these executives will tend to ignore investments in innovation and training. Some companies actually fund their buybacks by laying off workers, offshoring jobs to low-wage countries, and taking on debt. The top executives’ weapon of value extraction becomes a weapon of value destruction. They are rewarded handsomely by not doing their jobs.

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