Corporate bosses have run wild during the pandemic.
In 2020, with the economy reeling, chief executives of struggling companies got their boards to move bonus goal posts and hand out “retention” awards to protect their fat paychecks while their workers lost jobs, income, and lives.
In 2021, as consumers struggled with rising costs, executives celebrated rising corporate profits with a buyback spree. This legal form of stock manipulation artificially inflates the value of a company’s shares—and the value of executives’ stock-based pay.
S&P 500 companies SPX, +0.36% bought back a record $ 882 billion of their own shares in 2021.
This year, the buyback party could get even wilder. The seven big oil companies alone are on track to blow $ 38 billion to $ 41 billion on share repurchases in 2022, even as consumers face continued pain at the pump.
President Joe Biden’s federal budget proposal would put a damper on the buybacks party. The plan would prohibit top executives from selling their personal stockholdings for a multiyear period after a buyback (or buyback announcement).
This would prevent CEOs from timing share repurchases to cash in personally on a short-term price pop that they themselves artificially created.
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Buybacks stink
Such maneuvers sure smell like insider trading, but a 2019 Securities and Exchange Commission investigation revealed they are a common practice: in the eight days following a buyback announcement, top executives sold five times as much stock on average as they had on an ordinary day.
The SEC also found that companies where insider executives had cashed in their own stock to take advantage of a buyback spike performed worse over the long term than other corporations.
This should hardly be surprising. Money blown on buybacks is money not spent on workers, training, research and development, and other productivity-boosting investments.
In addition to the new restrictions on CEO buyback behavior, the Biden budget also includes a 1% excise tax on share repurchases. The president announced his support for such a tax last year. In addition to discouraging the wasteful use of corporate resources, the tax would generate an estimated $ 124 billion over 10 years.
Meanwhile, under the leadership of Biden appointee Gary Gensler, the SEC has proposed new regulations to require companies to report a share repurchase within a day of the transaction, rather than the current practice of a quarter-long delay.
Regulators are also working on long-overdue regulations on Wall Street pay, another opportunity for reining in buyback manipulation and excessive executive compensation in general.
More should be done
Buybacks aren’t the only problem with CEO pay, and the Biden administration could do more to fix it.
Top executives today typically make hundreds of times more than lower-level employees who also contribute value to their enterprises. Study after study has indicated that such extreme gaps also undermine productivity by lowering employee morale.
We saw that play out last week when workers went on strike over low pay at Maximus, a federal call center contractor and student loan processor. Maximus MMS, -0.54% CEO Bruce Caswell made $ 7.9 million in 2021—208 times more than the firm’s median pay of just $ 38,059.
The president doesn’t need to wait for Congress to take action. He could, for instance, use executive authority to make it hard for companies with large pay gaps such as Maximus to get federal contracts or other forms of government assistance.
By taking the fizz out of the buybacks blitz, though, the Biden budget proposals would be a huge step in the right direction. Many would argue that the party should be shut down altogether. Share repurchases, after all, were essentially illegal until 1982.
But the Biden plan sends an important message. Our CEO pay system is out of control and it’s time for responsible government action to fix it.
Sarah Anderson directs the Global Economy Project and co-edits Inequality.org at the Institute for Policy Studies.
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