Eric Nelson | Compensation Management 549
I believe excessive executive compensation has led to wage inequity in America and is making U.S companies less competitive due to lack of investment in corporate funded research and development, capital improvements, and real wage increases for employees.
Due to the percent of executive compensation that is paid in bonuses, primarily stock-option bonuses, I feel it’s important to provide the following context. The passing of Securities and Exchange Commission Rule 10b-18 in 1982 provides a “safe haven” from liability for companies to repurchase shares of their stock on the open market. This is commonly known as stock buyback programs. Companies allocate a percentage of their yearly profits to repurchase shares of their stock. These repurchased shares are the primary source of stock option bonuses awarded to executives, key and highly compensated employees. So, what’s the problem? Today, companies are allocating a large percent of their profits to stock buyback programs, and not allocating profits to reinvest in the company infrastructure, research and development, or real wage increases for employees. From 2003 to 2012, 449 companies of Fortune 500 companies spent 54% of their profits, $2.4 trillion, on stock buyback programs. Another 37% of profits went to paying shareholder dividends, leaving only 9% of profits to be reinvested back into the company and employees (Lazonick, 2014). The reduction of corporate tax rates with the passage of the Tax Cuts and Jobs Act of 2017 even further accelerated stock buyback programs. Just in 2018, publicly traded companies spent $1 trillion dollars repurchasing their stock shares, 95% of which were purchased in open markets. (Kennon, 2021).
CEOs and key executives, with the approval of the board of directors, determine how much of a company’s profits will be allocated to stock buyback programs. In addition to the repurchased shares being allocated for stock option bonuses, executives also benefit from the increase in value of the shares they currently own, or have been granted, as generally a company’s stock price increases in value when there are fewer shares on the open market. This process is creating a potential conflict of interest by company executives having the opportunity to manipulate the primary source of their bonus pay- the value of the company’s stock.
As of late, there have been calls by stake-holder groups to revise SEC rule 10b-18, which in turn would have a direct impact on executive compensation. The link below is an article on this topic.
https://www.sec.gov/rules/petitions/2019/petn4-746.pdf
I recommend executive compensation be focused on annual base pay with bonuses being capped at a percentage of annual base pay through new regulations. With bonus levels being regulated, all publicly traded companies will be on a level playing field in recruiting and retaining top executive talent. I would like to believe top performing executives will be motivated to work hard to increase company profits for the purposes of share-holder value, reinvestment into research and development, company infrastructure, and real wage increases for employees.
An additional article on this topic that I found interesting.
