Posts Tagged ‘Stock Buybacks’

Highest-paid CEOs are mostly below-average CEOs

July 27, 2016

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I always thought, based on long-ago conversations with compensation expert Graef Crystal, that the relationship between chief executive officer pay and corporate profitability was random.

But a new study indicates that there is a relationship—a negative one.  The higher-paid CEOs actually deliver less for stockholders than the lower-paid CEOs do.

What’s odd about this is that CEO compensation packages are structured so as to reward them for gains in stock prices.

It’s an example of Goodhart’s Law in operation.   All other things being equal, the rise and fall of a company’s stock price, relative to other companies in the same business, is a measure of how well a company is doing.  But there are ways for a CEO to manipulate the stock price that has nothing to do with company performance.

One is stock buy-backs.  These increase the price of the remaining shares.  But often the money might be better spent on making improvements in the company’s operation.

Another is layoffs or shifts to low-wage locations.  These immediately boost a company’s profitability by reducing the expense of wages.  But sometimes it costs the company in the long run to have the work done by workers who are low paid, but also less skilled, less well-trained and less loyal to the company.

All CEOs of big companies are well-paid—and should be.  Maybe what the chart tells us is that there are those who spend time negotiating or manipulating even higher pay that they should have spent tending to their businesses.

Maybe the best plan is to hire or promote a good person to be CEO, pay that person adequately and leave them alone.  A CEO who needs an extra incentive to do a good job shouldn’t be a CEO.

LINK

Highest-paid CEOs run worst-performing companies, research finds by Peter Yeung for The Independent (UK)

Disinvesting in America, and what to do about it

March 21, 2016

Corporate executives and holders of financial assets—I’ll call them “capitalists” for short—are ceasing to invest in American industry.

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Instead corporations are investing their profits in buying back stock, which automatically increases the value of the rest of the stock.  This, by the way, were an illegal form of stock market manipulation prior to 1982.

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Meanwhile American manufacturing jobs are going away.

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Another stock market bubble ready to pop?

May 7, 2015

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Why are stock prices rising while the real economy is doing so badly?

Answer: Stock buybacks.

Mike Whitney, writing for Counterpunch, explains how corporate CEOs keep their stock prices high even when their sales and profits are lagging by borrowing money and buying back stock.

CEO salaries and bonuses are typically tied to stock prices, so CEOs are rewarded for increasing their corporate debt rather than figuring out how to improve efficiency and make better products.  Whitney quoted Wall Street analysts as saying stock buybacks account for more than half the post-recession rise in the stock market.

Janet Yellen and Ben Bernanke at the Federal Reserve Board made this possible by holding down interest rates, an action that punishes risk-averse small savers who’d prefer to keep their money in insured bank accounts and pushes them into the financial markets.

That’s why the financial markets are doing so well and working Americans are doing so badly.  But this cannot go on forever, and I think the next crash will be worse than the previous one, just as the current recovery is worse than the previous one.

LINKS

The Rich Get Richer: Titanic Stock Bubble Fueled by Buyback Blitz by Mike Whitney for Counterpunch.

The Whisper of the Shutoff Valve by John Michael Greer on The Archdruid Report.