John Buell

Stockholder Buyback Scam

Why have CEO salaries become so unanchored to either corporate performance or the pay of ordinary corporate staff? And what are the consequences? The conventional wisdom among the markets-are- always- right set is that executive pay is a reflection of the marginal contribution or the value added by the corporate CEO. Extraordinary performance merits extraordinary compensation. Without these salaries corporate heads would bolt the organization and the corporations would suffer the loss. There are numerous problems with this analysis. It is extremely hard to measure the value added of the corporate CEO. Historically, during the golden age of US capitalism, the ratio of CEO compensation w front line workers was about an order of magnitude less. International comparisons also lend scant comfort to the market argument. Germany, the world high tech export superpower, pays its CEOs far less than their US counterparts.

The CEO compensation issue is often treated as a moral question. The gap from top to bottom leaves increasing numbers of citizens financially insecure while assuring the winners not only wildly disproportionate affluence but also inordinate political power. These considerations are all valid, but equally important is the question of just how corporate CEOs obtained this economic clout and what the consequences are.

In a recent Naked Capitalism blog post Yves Smith cites recent work that nicely summarizes causes and consequences of CEOs rampant inflation spiral: “According to Barclays, US companies have lavished more than $500 billion in the past year on stock buybacks – a multiple of what most are spending on research and development and other capital investments. In the first six months of the year, buybacks surged to $338.3 billion – the largest half-yearly volume since 2007. The rationale is simple. By reducing the volume of outstanding shares, chief executive officers increase earnings per share. That in turn lifts their pay, which is heavily tied to short-term stock performance. If you need an explanation for why the top 0.1% is doing so well, start with equity-based compensation.”

Corporate CEOs claim this practice is justified by a lack of good investment opportunities. Yet as Andrew Haldane of the Bank of England points out, this lack is a function of unrealistic expectations about the future as well declining ability of CEOs to do their traditional job — identify core strengths and opportunities. If Exxon/Mobile were truly to implement its desire to initiate alternative energy projects, a commitment of the billions it has employed in stock buybacks would open vast opportunities for other business executives. In addition, there is a self-fulfilling prophecy aspect to this story. When fellow CEOs decline core investments everyone else suffers. Theories like Lawrence Summer’s secular stagnation then add the frosting of intellectual icing to the cake.

Several factors have contributed to the power to engage in such irresponsible and counterproductive behaviors. The late seventies and early eighties saw the hollowing out of US manufacturing. So called “free trade” treaties, which gave corporations international copyright protection even as they stripped labor of key rights played a major role. Nonetheless the Fed and the dollar were also in important aspect. Paul Volcker’s Fed fought inflation with high interest rates and an overly strong dollar. With this hollowing out came attacks on unions. Thus the economy once characterized in John Kenneth Galbraith’s terms as one of countervailing power became instead the Predatory State lamented by his son James. Unbridled executive power is not further cemented by compliant boards of directors, often chosen by the CEO, who set executive compensation.

Reagan era deregulation also played a key role. We often forget that the US corporation is a complex legal structure with special privileges, especially its limited liability. Investors in corporations receive special protections. If I invest in a corporation the most I can lose is the amount of the original investment. My home and other assets are not threatened, as is often the case with small unincorporated enterprises. Limited liability did help accumulate the capital that made the industrial revolution possible. Starting even in the late Carter years, much of the regulatory quid pro quo for special privileges was stripped away, eventually laying the groundwork for the ultimate deregulatory disaster, financial deregulation. Liberalizing corporate stock buy-back regulations has been an important though often neglected aspect of the transformation of US capitalism. The executive suite became part of a whole casino and most Americans have paid a heavy price.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. Email Jbuell@acadia.net.

From The Progressive Populist, November 1, 2014