The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s a blog from Michael Levin of “The Activist Investor”:

Everyone goes after share repurchases lately, as depriving companies and even the US economy of needed investment funds. We investors know better. The latest in the long series of criticisms, in Bloomberg Business this week, asserts that buybacks serve mostly to increase CEO pay unfairly. At several big companies (IBM, Cisco) they reviewed, exec comp depends in large part on EPS or share prices. So, share repurchases increase EPS or share prices by removing shares from the float.

This thinking leads corporate defenders, big conservative institutional investors, and even some pension funds that typically advocate for corp gov reforms to urge companies to curtail repurchases. Alas, this thinking responds to the wrong problem. Instead, structure CEO pay properly. Why link it to EPS, which companies can influence through creative accounting, or to share price, which varies with factors far beyond the control of executives? Pay executives based on the value they create relative to the capital needed to create it. Let’s use return on investment, return on equity, economic value added, or other similar measures, ok?

By the way, here’s the latest about political backlash against stock buybacks…