Why CEOs Love Buybacks (One Simple Chart)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

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 to explain 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, the management year end bonus will 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 we said a month ago…

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 via buybacks is a loser's game in the end for a company's staying power (as opposed to capex and real investment)

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