Looking back to the 90's when Clinton passed a business expense deduction exclusion for executive pay over $1M, buybacks on a nominal and real basis have increased. Clinton did allow for the deductibility of performance based stock options as a component of CEO pay.

CEO pay at the high end has shifted almost entirely (on a % of the whole) to options driven largely by the legislation put in place during Clinton's tenure. Buybacks are a key component of making that pay structure hum.

On one hand, buybacks raise the share price which gives the general impression of benefit to all owners.

On the other EPS manipulation can give a false impression of company performance leading to poor outcomes for retail & institutional investors.

From the company's perspective, share buybacks can be a good use of excess cash reserves.

Alternatively, companies can spend all of their excess capital on buybacks rather than holding dry powder for bad times. Boeing, for example, approached the government for a $60B handout in 2020. Between 2015 and 2019, Boeing spent over $61B on buybacks...over 80% of its profit. Including dividends, in excess of 100% of its profit.

themissinglink said:

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It's just a return of capital to shareholders. Not good or bad necessarily. Politics making buybacks the boogeyman is stupid.

If a company can't find a positive NPV project, I'd rather they return the funds to shareholders who can find a better use of the funds and the tax code makes it more efficient to distribute via capital gains instead of dividends.

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Is it a return of capital to all shareholders or is it a return of capital to the shareholders whose shares were purchased?

Now, for a confounding factor: Vested and unvested employee stock options (or restricted stock, or other profit sharing mechanisms). I could argue all sides of this, but the one thing I've become convinced about - - shareholders have a right to know what impact and potential impact these items have on the company's balance sheet and potential future net income. I think additional new disclosure regulation is inevitable, and would at least provide another data point for valuing potential investments.

You could argue that companies in the high-growth tech sector (who use equity as a significant part of employees' overall compensation) could have a huge impact from a stock buyback, in favor of employees over shareholders, proportionally. I'm undecided if that's a good or bad thing, as if equity awards are scaled back, salary expense would almost certainly have to increase to attract and retain talent. Generally, aligning employee interest directionally with stockholder interest is a good thing, but I'd still like to know how much is at stake.

I bleed maroon said:

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I totally agree with everything you said (especially the politics of the issue), but don't I as a shareholder have a right to know how the off-balance-sheet items might influence my investment value? I can't evaluate capital allocation decisions made if I don't know about them.

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This certainly was the reasoning behind updated lease accounting standards to bring those off balance sheet lease liabilities onto the balance sheet.

I bleed maroon said:

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Aglaw97 said:

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I bleed maroon said:

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Now, for a confounding factor: Vested and unvested employee stock options (or restricted stock, or other profit sharing mechanisms). I could argue all sides of this, but the one thing I've become convinced about - - shareholders have a right to know what impact and potential impact these items have on the company's balance sheet and potential future net income. I think additional new disclosure regulation is inevitable, and would at least provide another data point for valuing potential investments.

You could argue that companies in the high-growth tech sector (who use equity as a significant part of employees' overall compensation) could have a huge impact from a stock buyback, in favor of employees over shareholders, proportionally. I'm undecided if that's a good or bad thing, as if equity awards are scaled back, salary expense would almost certainly have to increase to attract and retain talent. Generally, aligning employee interest directionally with stockholder interest is a good thing, but I'd still like to know how much is at stake.

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Call me old school, but the Company has a right to make the decisions they believe are in the best interest of the Company and it's stockholders, including how they manage their balance sheet. If you disagree with the decisions made, you are welcome to sell your stock and reinvest with a Company that aligns with your views.

If management believes the stock is undervalued, they should have the right to purchase it back. It's no different than any investor buying low. Also keep in mind that if the Company pays dividends, buybacks allow them to increase the dividend at a future date without increasing the cash outlay needed to cover the dividend.

The issue of stock buybacks has become too politicized as an easy attack on 'evil' Companies making too much money. You don't see the same level of scrutiny on companies incurring debt, investing capital, deploying cash in other areas. This is essentially no different. It's just a decision of the best use of cash.

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I totally agree with everything you said (especially the politics of the issue), but don't I as a shareholder have a right to know how the off-balance-sheet items might influence my investment value? I can't evaluate capital allocation decisions made if I don't know about them.

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The reality is that you aren't going to know about every decision made in real time. But material decisions are typically made public and other decisions will manifest through proving it via the financials or otherwise. And in the case of buybacks, almost every company announces when one is authorized prior to buying any shares. And details regarding the level of those buybacks are publicly available in 10-Q's and 10-K's. The SEC pushed for expanded disclosure on these and it was found unconstitutional. But there is disclosure out there mandated by the SEC. If you disagree with the buyback in general or the levels at which the Company is executing and/or financing them, you do have access to that information and can decide whether to hold or sell the stock.

chris1515 said:

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Putting on my Forum 16 tinfoil hat here for a moment…

For execs and wealthy that own large portfolios of stock and are using it as collateral for margin loans to avoid having to sell and realize capital gains, inflating the stock thru repurchases is only further facilitating that tax loophole. Its a way for companies to transfer income to their wealthiest/savviest owners without triggering any tax exposure.

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No. MV of a company declines from the outlay of cash. It is EPS that increases. A large shareholders value difference should be inconsequential. Option holders and holders of various performance based RSUs and other exec equity comp can be EPS based and have a perverted impact. However, many of those with EPS ties are "adjusted EPS" or similar and take into account these concepts.

Quote:

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The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

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Our CFO "left" when we did a share repurchase at a ridiculously high price

Warren Buffett complains about dumb buy backs. The CEO decides to do buyback when stock is high. Not because it is good for company but because a big chunk of his salary is based on stock price. They are screwing shareholders to line their own pockets. Money could be spent on R&D, keeping talented staff, etc. Or saving it for downturn in next cycle.

Buffett clearly likes smart buy backs.

Don't disclosures already include diluted amounts to indicate what would happen if all options, warrants, etc are exercised?

And the tax law changed so now performance based doesn't matter for the $1M comp deduction limitation. The change was also stealthily written so that it will continue to pull more and more employees in over time.

It is not a return of capital transaction. It is a buy-sell transaction.

Buybacks are really just investments in the current operations. If the stock is overvalued it's good for the selling stockholders and not so good for the remaining stockholders. Opposite if the stock is undervalued. I'd like to see the numbers on EPS manipulation and how significant it is to executive comp generally.

I have no beef with buybacks, I have a beef with the amount of RSUs handed out like candy at some companies. It's getting crazy.

__________ Buybacks are not an investment. They reduce cash and shareholder equity. The shares are termed Treasury Stock in Shareholders Equity. (Treasury is just a word.. .there is no treasury.)

strbrst777 said:

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__________ Buybacks are not an investment. They reduce cash and shareholder equity. The shares are termed Treasury Stock in Stockholders Equity.

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If taken to the extreme, buybacks to infinity = company taken private. So I would agree with the reduction in equity.

Why? It's the only thing keeping rank and file employees afloat when revenue and margins are increasing, execs are receiving massive grants, and then at the same time companies still divvy out 4-5% pay increases when CPI measures are 7%+.

Hah, I'm pretty sure "rank and file" employees aren't getting RSUs but that might just be an industry biased view of mine.

My industry sure does. At current company every rank employee gets some level of RSU.

At a prior role, I received RSU's that usually came out to about 30% - 50% of comp ex. bonus. I guess I think of it as a comp method at that scale and not so much just a small part of the whole.

Happy to stand corrected. I can definitely see RSUs being a big tool in a private company with owners looking for an exit/liquidity event. Along the lines of, we can't afford to pay your now...but later we're gonna hook you up! My situation was in a public company.

I'm with a public company as well. Every public company I've worked at granted RSUs to employees at some level. Some companies limited it to more of the technical disciplines and management, while others gave RSUs to all employees but at different levels based on position/experience. I also consider RSUs as a form of compensation, just not a guaranteed source such as your annual salary. Same as cash bonuses.

The private companies I worked for in the past never gave any type of equity stake in the company, only cash bonuses.

txaggie_08 said:

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I'm with a public company as well. Every public company I've worked at granted RSUs to employees at some level. Some companies limited it to more of the technical disciplines and management, while others gave RSUs to all employees but at different levels based on position/experience. I also consider RSUs as a form of compensation, just not a guaranteed source such as your annual salary. Same as cash bonuses.

The private companies I worked for in the past never gave any type of equity stake in the company, only cash bonuses.

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I'll just preface my original post with "in my experience" and shutup now. It appears my experience is not widespread. Back to regularly scheduled programming

Discussion here is highlighting why so many have a problem with equity plans and corporate buy backs.

Equity comp is important for key EEs/execs, and even down to rank and file. It is also dilutive to investors. Buy backs can help correct for dilution, but is a use of cash some investors/EEs don't like. All of this needs to be reasonably in balance. No more complicated than that to me.

Enron employees were given their entire match in stocks, but they weren't vested until age 50, IIRC. Is that even still legal? It shouldn't be. Forcing employees to drink the Kool-aid for that long encourages unethical behavior by employees, artificially inflates stock values, and hangs employees out to dry for being highly leveraged in company stock. Isn't someone already a "true believer" when they take the company paycheck? Why should they also have their entire retirement portfolio tied up in company stock as well?

And as far as technology companies go, it was sad seeing the charlatan Jack Welch slowly turn GE from an innovative company into a paper tiger investment bank, with one of the primary tools being stock buybacks. He apparently laid the blueprint for companies to focus on share price instead of product development. Pour one out for them.

Equity compensation makes sure the employees have skin in the game for the success of the company.

bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Absolutely - some to more degree than another. I think the issue I wanted to debate is that, much like any other performance based incentive, equity comp can be manipulated.

Say your bonus was based on return on assets, you could juice short term return by not making significant capital reinvestment in the assets....until they all break down and no return.

Buy backs can work in a similar fashion. You could make an ill-considered decision to buy back and be well rewarded for your equity comp in the business. It's been pointed out that if the NPV of other considered investments/alternatives is no better than the buyback, go for it. If you are just juicing stock price rather than making more critical long term investments...that may not be the skin in the game that is best for the business.

I think that all comes back again to, it's the people, not the tools, that generate bad outcomes.

bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Same company 26 years. Wouldn't keep a single Share one more minute than I was forced to. Liking my job is all the skin I need, boomer.

Executives believe stuff like this as a form of acting out. They're just telling us that THEY don't have loyalty and need to be bribed to stay.

94chem said:

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bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Same company 26 years. Wouldn't keep a single Share one more minute than I was forced to. Liking my job is all the skin I need, boomer.

Executives believe stuff like this as a form of acting out. They're just telling us that THEY don't have loyalty and need to be bribed to stay.

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So you would prefer that executives receive the same compensation regardless of whether the company performs well, or poorly?

northeastag said:

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94chem said:

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bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Same company 26 years. Wouldn't keep a single Share one more minute than I was forced to. Liking my job is all the skin I need, boomer.

Executives believe stuff like this as a form of acting out. They're just telling us that THEY don't have loyalty and need to be bribed to stay.

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So you would prefer that executives receive the same compensation regardless of whether the company performs well, or poorly?

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Didn't say that. But, since you asked, the metrics are generally useless, and company shares create a huge conflict of interest.

94chem said:

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northeastag said:

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94chem said:

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bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Same company 26 years. Wouldn't keep a single Share one more minute than I was forced to. Liking my job is all the skin I need, boomer.

Executives believe stuff like this as a form of acting out. They're just telling us that THEY don't have loyalty and need to be bribed to stay.

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So you would prefer that executives receive the same compensation regardless of whether the company performs well, or poorly?

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Didn't say that. But, since you asked, the metrics are generally useless, and company shares create a huge conflict of interest.

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Just to clarify, your comment is that executives owning shares in the company that employs them creates a huge conflict of interest?

Also, what metrics are you referring to?

northeastag said:

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94chem said:

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northeastag said:

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94chem said:

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bmks270 said:

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Equity compensation makes sure the employees have skin in the game for the success of the company.

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Same company 26 years. Wouldn't keep a single Share one more minute than I was forced to. Liking my job is all the skin I need, boomer.

Executives believe stuff like this as a form of acting out. They're just telling us that THEY don't have loyalty and need to be bribed to stay.

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So you would prefer that executives receive the same compensation regardless of whether the company performs well, or poorly?

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Didn't say that. But, since you asked, the metrics are generally useless, and company shares create a huge conflict of interest.

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Just to clarify, your comment is that executives owning shares in the company that employs them creates a huge conflict of interest?

Also, what metrics are you referring to?

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Yes, that's exactly what I'm saying. Decrease the denominator. Make the short term numbers look better. Slash strategic expenditures. Cozy up to the shareholders (dividend bribes can help with that). Profit. Parachute. Bora Bora.