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Why CEOs Love Buybacks (In 1 Simple Chart)

Tyler Durden's picture




 

The CEOs of U.S. companies are compensated exceedingly well with the heads of the S&P 500 paid 331 times as much, on average, as production and nonsupervisory employees. As we wrote a month ago while explaining the 'mystery and completely indiscriminate' buyer of US stocks: "since a vast majority of executive compensation agreements are tied to company stock "performance"; C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight)." Sure enough, as HBR explains, executive comp in recent decades comes down to four words: stock options and restricted stock (and more and more in the last few years).

Via Harvard Business Review,

The CEOs of U.S. companies are compensated exceedingly well. A recent analysis by the AFL-CIO found that the heads of S&P 500 companies are paid 331 times as much, on average, as production and nonsupervisory employees. Regardless of whether this is fair - some believe that CEOs aren’t paid nearly enough - it’s worth understanding how we got here.

 

As the black line shows, CEO pay took off in the 1990s. This resulted in part from activist shareholders’ and academics’ pushing for stronger links between compensation and returns. The SEC also changed holding-period rules so that the acquisition of an option rather than its exercise was the basis for reporting a purchase, making stock options much more attractive to executives.

 

Kevin J. Murphy, a professor at the USC Marshall School of Business and an expert on executive pay, has collected data and examined research on the earnings of the S&P 500 CEOs since 1992. He finds that - as the bands of color illustrate above - much of the story of executive comp in recent decades comes down to four words: stock options and restricted stock.

And here is what we said a month ago...

In short, corporate CEOs and CFOs couldn't care less if your friendly Wall Street broker uses the repurchase allocation to buyback the stock at all time highs. In fact, since a vast majority of executive compensation agreements are tied to company stock "performance" C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight).

 

So the next time someone asks who keeps on buying stock despite all the negative newsflow, despite the bond yield sliding ever lower despite relentless broken-record pleas that a "recovery is just around the corner", and with vol near all time lows confirming peak complacency... now you know.

Except when the cheap money runs out (or reach for yield demand slows) and investors' mindsets finally switch to realize that appeasement viua buybacks is a loser's game in the end for a company' staying power (as opposed to capex and real investment)

 

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Fri, 06/27/2014 - 08:23 | 4901585 buzzsaw99
buzzsaw99's picture

bring back vlad the impaler

Fri, 06/27/2014 - 08:27 | 4901597 Top Gear
Top Gear's picture

Today, we live in the Age of Envy. ~Ayn Rand

aynrandlexicon.com/lexicon/envy-hatred_of_the_good_for_being_the_good.html

Fri, 06/27/2014 - 08:28 | 4901606 buzzsaw99
buzzsaw99's picture

go away

Fri, 06/27/2014 - 08:34 | 4901628 Top Gear
Top Gear's picture

'The question isn't who is going to let me; it's who is going to stop me.' ~Ayn Rand

Fri, 06/27/2014 - 08:37 | 4901639 LetThemEatRand
LetThemEatRand's picture

"The question isn't 'what are we going to do,' the question is 'what aren't we going to do'  ...  - Bueller

Fri, 06/27/2014 - 08:23 | 4901586 The Axe
The Axe's picture

You can always open that golden parchutte if the shit hits the fan...good work if you can get it.

Fri, 06/27/2014 - 08:27 | 4901599 LetThemEatRand
LetThemEatRand's picture

There's an image I can rally behind -- a CEO deploying a golden parachute being lifted by the air flow of a fan spraying shit.

Fri, 06/27/2014 - 08:38 | 4901641 Top Gear
Top Gear's picture

Parisitical Persecutor!

"Only businessmen—the producers, the providers, the supporters, the Atlases who carry our whole economy on their shoulders—are regarded as guilty by nature..." ~Ayn Rand, “America’s Persecuted Minority: Big Business,” Capitalism: The Unknown Ideal, p. 51

Fri, 06/27/2014 - 08:42 | 4901653 duo
duo's picture

The 100X rule should apply to any public company that buys back it's own stock. It really is theft from their own shareholders and employees (by wasting cash instead of inveesting it or raising wages).

Fri, 06/27/2014 - 08:52 | 4901698 Top Gear
Top Gear's picture

I see that red star on your commie hat.

(1) the rise in CEO pay was in line with that of other elite positions, such as professional athletes;
(2) the rise in pay continued even as fewer CEOs chaired their board of directors;
(3) the companies that paid CEOs the most generally had stock returns much greater than other companies in their industries, while companies that paid their CEOs the least underperformed in their industries.

The critics of CEO pay ignore all of this.

The Corrupt Critics of CEO Pay
ari.aynrand.org/issues/government-and-business/capitalism/The-Corrupt-Critics-of-CEO-Pay

 

Fri, 06/27/2014 - 09:20 | 4901827 duo
duo's picture

Using cashflow to buy back your own stock of course makes the stock price go up.  Stock price up, more CEO pay.  See how that works?

If corporations only exist to line the pockets of a few dozen well-connected, then capitalism is doomed to fai.

Know your meme: https://www.youtube.com/watch?v=wRXKHTTzayU

 

Fri, 06/27/2014 - 09:18 | 4901817 JRobby
JRobby's picture

Must be Ayn Rand Day? Greenspan really loved her.

Fri, 06/27/2014 - 09:43 | 4901919 Top Gear
Top Gear's picture

Was Greenspan that Privation, er, Private Banker for that Privileged, er, Privately Owned Bank?

And what's wrong with a little etymological lesson on the Latin word privare?

Fri, 06/27/2014 - 09:53 | 4901974 JRobby
JRobby's picture

Nothing really.

Just scary that I see Ayn Rand assigned in high schools. 

Fri, 06/27/2014 - 10:13 | 4902061 Top Gear
Top Gear's picture

What's wrong with forcing kids to accept our Glorious Capitalist Revolution using an American Icon?

Rand herself—says to a Bolshevik: "I loathe your ideals. I admire your methods. If one believes one's right, one shouldn't wait to convince millions of fools, one might just as well force them."

~How Ayn Rand Became an American Icon, Nov. 2, 2009 ?slate.com/id/2233966/

Always remember:

1. Wealth trickles down, so be patient, and work harder.
2. You're better off the capitalist way than in a North Korean mud hut.
3. Just because a boss is ordering you around all day doesn't mean you're not free.
4. CEOs need stone-cold inspiration from guys like William Hickman, a "real man," or they won't be profitable.

"The best and strongest expression of a real man's psychology I have heard." ~Ayn Rand, Journals of Ayn Rand, pp. 21-22. [source: Ayn Rand and William Hickman, http://michaelprescott.freeservers.com/romancing-the-stone-cold.html ]

We've got to support our CEO heroes in their struggle to be a real man, and you can't do that reading something that might contain an anti-greed message.

Fri, 06/27/2014 - 12:21 | 4902570 malek
malek's picture

Among all the cherry-picked out of context quotes and accusations, I still haven't read a single line what you would prefer instead.

Fri, 06/27/2014 - 13:36 | 4902869 Death and Gravity
Death and Gravity's picture

LOL a randroid.

Fri, 06/27/2014 - 08:29 | 4901610 Top Gear
Top Gear's picture

May my friends' salaries rise forever.

"The rise of capitalism swept away all castes, including the institutions of aristocracy and of slavery or serfdom." ~Ayn Rand
aynrandlexicon.com/lexicon/egalitarianism.html

Fri, 06/27/2014 - 10:48 | 4902207 roadlust
roadlust's picture

Yeah, THREE WORDS.

Conflict of Interest.

They also get a piece of the action (like real estate salesmen) for and M and A.  Whether the company they pay for helps of hurts the bottom line of thier own company, they get a FLAT PERCENTAGE of the dea!   (See: Compaq computers and Fiorini.) 

And of course, then they get bonuses when it turns out all of this was bad for shareholders and they "part ways."

It's like owning a large corporation without having to put any of your own money down.

Fri, 06/27/2014 - 08:27 | 4901593 lunaticfringe
lunaticfringe's picture

It's almost like a form of legal embezzlement when you think about it. Converting shareholder assets into your very own compensation plan.

Fri, 06/27/2014 - 08:31 | 4901619 Top Gear
Top Gear's picture

The American businessmen, as a class, have demonstrated the greatest productive genius and the most spectacular achievements ever recorded in the economic history of mankind. What reward did they receive from our culture and its intellectuals? The position of a hated, persecuted minority.

~Ayn Rand
Capitalism: The Unknown Ideal
“America’s Persecuted Minority: Big Business,”
Capitalism: The Unknown Ideal, p. 48
aynrandlexicon.com/lexicon/businessmen.html

Fri, 06/27/2014 - 08:35 | 4901633 firstdivision
firstdivision's picture

The American CEO has become a parasite that gives blowjobs to PE, and secures golden parachutes for themselves.  Ever since the push of stockholder interest over stakeholders, the American businesses have suffered. 

Fri, 06/27/2014 - 08:45 | 4901666 Top Gear
Top Gear's picture

"Stakeholder" is parisitical Marxist drivel, promoting:

"...the idea that executives and shareholders should be forced to sacrifice money-making for the sake of sundry "stakeholders."

 Pay Is Company's Prerogative
Yaron Brook | January 08, 2007
ari.aynrand.org/issues/government-and-business/capitalism/Pay-Is-Companys-Prerogative

Fri, 06/27/2014 - 08:45 | 4901657 lunaticfringe
lunaticfringe's picture

The ability of owners as a class of people- to incentivize and bribe managers or CEO's- into obtaining the greatest amount of work with the least amount of compensation- is a point wherein I disagree with Ms. Rand despite the God like status some confer upon her.

In other words, incentivizing and bribing your work force can also attract the highest quality of work and productions as well- it just tends not to enrich the owners as much and God knows greed is a virtue in 'merica.

Fri, 06/27/2014 - 09:17 | 4901815 Top Gear
Top Gear's picture

<< greed is a virtue >>

Indeed.  It is even "radiant." And objectively sexy. One may discover that in Part III, Chapters 2, THE UTOPIA OF GREED, and Chapter 3, ANTI-GREED, of Atlas Shrugged.

"If hell is the price—and the measure—then let me be the greediest of the three of us." ~Dagny Taggart (Ayn Rand, Atlas Shrugged)

Greed even factors into the benevolent rape of Dagny Taggart by John Galt:

"He tore off her cape and she felt the slenderness of her own body by means of the circle of his arms, as if his person were only a tool...the same inexhaustible quality of radiant greed. He pulled her head back for a moment...she felt the mesh of burlap striking the skin of her shoulders...the driving greed that went reaching on and on..." (Ayn Rand, Atlas Shrugged)

 

Fri, 06/27/2014 - 09:57 | 4901986 JRobby
JRobby's picture

The capital markets is what pushed the 20th century forward at the speed experienced.

The capital markets are what have now destroyed that in a few short years in the 21st century.

Fri, 06/27/2014 - 08:39 | 4901647 juggalo1
juggalo1's picture

That's an odd statement.  [Ex-]shareholders are the ones getting the money when the company performs a buyback.  The link to executive compensation is only tenuous.  To say that executives are raising shareholder returns to boost their own compensation is a very odd statement.  It's like saying "My wife is being nice to me all the time, but only so I will love her more."

Fri, 06/27/2014 - 08:27 | 4901601 Cognitive Dissonance
Cognitive Dissonance's picture

Hard to ever consider "A" if you are paid only to think about "B".

Fri, 06/27/2014 - 08:49 | 4901683 lunaticfringe
lunaticfringe's picture

With precision, CD. Or the only solution that could possibly work is the one where my benefit is always the greatest.

Fri, 06/27/2014 - 08:28 | 4901602 youngman
youngman's picture

Its so back door..but what is funny is how many are doing it right now....its the fad of today for sure...

Fri, 06/27/2014 - 08:31 | 4901616 firstdivision
firstdivision's picture

some believe that CEOs aren’t paid nearly enough

Who the fuck thinks CEO's aren't paid enough?!?  CEO's pay has yet to reflect the performance of the company.  Hell, look at the CEO's pay for BSC and LEH just prior to their demise, which the CEO on down to VP's should have been sued into bankruptcy by the creditors, but the creditors are in the game to so they settle for pennies on the dollar.

Fri, 06/27/2014 - 10:01 | 4902004 saltedGold
saltedGold's picture

"A survey conducted amongst 2500 CEOs showed 98% felt their pay was not enough and deserved at least 50% more compensation.  Of that group, 99% believed in not giving raises to employees in order to keep more money for themselves."

Corporate Slime Magazine - April 2014 issue

Fri, 06/27/2014 - 08:33 | 4901627 Ghordius
Ghordius's picture

me, I don't mind CEOs earning 331 times moar than the lowest wage in the company. what I loathe that many CEOs have a possibility to reduce their "skin" in the companies to zero in very short time. bankers, in particular, should never reduce their "skin", then often their deals "produce" millions in bonuses immediately... where the realization that it was all bullshit can be ten years later, or more

Fri, 06/27/2014 - 08:37 | 4901638 Rjgroad
Rjgroad's picture

The combination of multiple years of Long Term Incentive Plan restricted stock awards and then mandatory share ownership requirements really drive the compensation explosion and over exposure to the stock price. Tieing mgt comp to stockholder success is not a bad thing until you game the metrics and also put substantial percentages of mgt net worth in mandatory stock holdings to ensure skin in the game. Then, what do you expect will happen? Shareholder selfinterest and mgt selfinterest become tightly aligned.

Fri, 06/27/2014 - 08:40 | 4901649 Eyeroller
Eyeroller's picture

Sounds similar to how VA officials were awarded bonuses with their secret waiting lists...

Fri, 06/27/2014 - 08:46 | 4901667 Ghordius
Ghordius's picture

 

not long ago, in the middle of the EU, the small non-EU-member country called Switzerland had a referendum, based on an initiative of the "Young Socialists"

the question was: do you want to add in the constitution an article prohibiting companies to compensate the highest wage earners in any companies more than 12 times the lowest wage earners?

the Swiss people voted no. I still think those young idealists made a capital error, by setting this number to 12. if they had set it higher, let's say 24 or 48, or even 124, it might have passed and created a very interesting precedent

I intensely dislike how "public" companies are constituted and regulated, nowadays. I'd ask for a fundamental change, separating how truly private companies should be treated and how companies where shareholdership is strongly diluted are treated. for me, this kind of CEO remuneration is a case of "absentee lordship" and "tragedy of the commons" rolled in one

the strangest part is that the staunch defenders of capitalism are convinced that this way is the only way. Adam Smith was a declared skeptic of the limited liability corporation... and this was before the advent of the modern bourse-traded common-stock company

 

Fri, 06/27/2014 - 09:04 | 4901752 lunaticfringe
lunaticfringe's picture

the strangest part is that the staunch defenders of capitalism are convinced that this way is the only way. Adam Smith was a declared skeptic of the limited liability corporation... and this was before the advent of the modern bourse-traded common-stock company

Exactly. This is precisely how Rand thought. Yet I once saw a business start up model where all 7 employees, and new employees, were all hired and given the very same large salary including the CEO and owner. The model was working flawlessly at the time- and unfortunately I've forgotten the details of that outfit including the name- to see how it all turned out.

Fri, 06/27/2014 - 10:08 | 4902036 Ghordius
Ghordius's picture

I'm by far not an expert on what Rand thought. yet re that business start up: capitalism implies freedom to fail. in fact, capitalism is superior to any other system only because failure is supposed to be detected and flushed out earlier than in any other system

Fri, 06/27/2014 - 10:25 | 4902103 lunaticfringe
lunaticfringe's picture

No argument here. Failure is a healthy part of any endeavor. The simpletons believe by removing potential failure- that they have produced some sort of utopia. Unfortunately- all they have created is some sort of zombie business culture where mal functioning companies which should die- never do. All it does in actuality- is prolong the inevitable.

Fri, 06/27/2014 - 08:50 | 4901691 Notsobadwlad
Notsobadwlad's picture

Capitalism is not the problem. Parasitic corruption and cronyism is the problem. We have arrived in a day and age when every CEO is stealing from the company through an agreed upon scheme and interlinked boards of directors.

There is no other explanation ... and all of the B/S rationalizations are just that. They are simple an transparent lies to defend theft, conspiracy and fraud.

Fri, 06/27/2014 - 08:54 | 4901707 Top Gear
Top Gear's picture

A crony is a friend. Would you prefer people be forced to do business deals only with strangers or enemies?

 

Fri, 06/27/2014 - 09:08 | 4901766 firstdivision
firstdivision's picture

When I reserve a hooker for the evening, I don't use a real name as I suspect they don't either. 

Fri, 06/27/2014 - 09:18 | 4901819 zerocash
zerocash's picture

A crony is a friend in government who can help you get special treatment that no-one else can get. He is only your friend as long as you keep paying him.

Fri, 06/27/2014 - 09:29 | 4901869 Top Gear
Top Gear's picture

Government is defined by libertarians as "just people." The Market is also defined by libertarians as "just people." So, according to libertarian definitions, there isn't much difference between the two, if any. And remember, government initiates markets to pay for war. (Sorry to dash your libertarian pixie-dust fantasy stories.)

"But if money and markets do not emerge spontaneously, it actually makes perfect sense. Because this is the simplest and most efficient way to bring markets into being. Let us take a hypothetical example. Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem—unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions. On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.

~Debt: The First 5,000 Years, by anthropologist David Graeber
http://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

 

Fri, 06/27/2014 - 09:19 | 4901829 JRobby
JRobby's picture

I believe the preference should be "arms length"

Fri, 06/27/2014 - 10:01 | 4902005 moneybots
moneybots's picture

"Capitalism is not the problem. Parasitic corruption and cronyism is the problem. We have arrived in a day and age when every CEO is stealing from the company through an agreed upon scheme and interlinked boards of directors."

 

The republican free marketeer politicians seem fine with that.  As a result, capitalism will be bashed when the crash comes, when it is not capitalisms fault.

Fri, 06/27/2014 - 09:00 | 4901733 praps
praps's picture

The 0.1% who own most of the US employ the best slave drivers who will get as much out of the slaves as possible while giving as litle as posible in return.  This maximises the profits for the 0.1%, and they don't mind handing some of that profit to their slave drivers, the CEOs

This is why CEO's get 331 their slaves' salary. They are the overcompensated lackeys of the 0.1%.

Fri, 06/27/2014 - 09:22 | 4901845 Top Gear
Top Gear's picture

Voluntary slavery is just another form of capitalist labor. Hell, even whips are just capitalist tools.

"He'd like more than anything else to boss me around, and then whip me every time I displeased him....Slave-master Rafe would never shell out the cold cash if, after he paid, I could haul him into court on assault and battery charges when he whipped me."

Voluntary Slave Contracts
by Walter Block, Austrian School economist
lewrockwell.com/block/block134.html

Fri, 06/27/2014 - 09:05 | 4901757 madcows
madcows's picture

They'll find ways to line their pockets one way or the other.  Buybacks are just the means of doing it.  If you take away their huge bonuses or stock option deals they'll get personal jets and limos and apartments, etc....

Fri, 06/27/2014 - 11:37 | 4902401 Chuck Knoblauch
Chuck Knoblauch's picture

Don't forget about the personal chef and limo driver.

Remember to tip the help.

 

Fri, 06/27/2014 - 09:49 | 4901946 Chuck Knoblauch
Chuck Knoblauch's picture

IT ARTIFICIALLY INFLATES EPS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

MONEY FOR NOTHIN' AND CHICKS FOR FREE

Fri, 06/27/2014 - 09:53 | 4901972 RaceToTheBottom
RaceToTheBottom's picture

The only role more self centered and motivated by self interest more than the US CEO role is the US WS Bankster.

Symbiotic relationship between idiot Savant Thief and Vampire Squid. 

Fri, 06/27/2014 - 09:55 | 4901983 moneybots
moneybots's picture

"Why CEOs Love Buybacks"

 

Will they still love them when the government raises their taxes to levels Picketty would cheer?

Nothing occurs in a vacuum.

Fri, 06/27/2014 - 10:47 | 4902199 orangegeek
orangegeek's picture

AFL-CIO

 

Oh right, the unions are doing that research.  That's a good idea.  Leave it to the unions, they make everything better.

Fri, 06/27/2014 - 11:03 | 4902282 moneybots
moneybots's picture

"...heads of the S&P 500 paid 331 times as much, on average, as production and nonsupervisory employees."

 

The thing about extremes is that they beget extremes in the opposite direction.  One of those Newton's law kind of things, like a parabolic always collapses.

 

 

Fri, 06/27/2014 - 11:45 | 4902426 rosiescenario
rosiescenario's picture

The compensation committee of the board supposedly sets the CEO's comp which includes stock options.

The underlying problem is that one, at many companies the CEO selects the board members; two, the board members are also rewarded with options. The board also has the approval authority on stock buybacks.

 

 

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