Wells Fargo acknowledged this month that its employees had, over the course of several years starting in 2011, opened as many as 1.5 million bank accounts and 565,000 credit card accounts that may not have been authorized by customers. The company agreed to pay $185 million in penalties and fines to settle cases brought by the Consumer Financial Protection Bureau ..
.. “You haven’t returned a single nickel of your personal earnings,” Senator Elizabeth Warren, Democrat of Massachusetts, rebuked Mr. Stumpf, as she urged him to resign. “It’s gutless leadership.”
Mr. Stumpf repeatedly said any forfeited compensation was an issue for the board — of which he is the chairman — to take up. “Whatever the board accepts, whatever they do, I will accept and I will support,” he said
.. but he already held nearly 5.5 million shares of stock owned outright or vesting imminently as of March, when Wells Fargo filed an annual disclosure of his holdings.
Based on Tuesday’s closing share price of $45.09, those 5.5 million shares would be worth nearly $247 million.
Corporate Executives Are Making Way More Money Than Anybody Reports
There are two methods for measuring compensation. One appears everywhere. The other is correct.
Data on these executives’ actual take-home pay, which is published, as required by law, in companies’ annual filings with the Securities and Exchange Commission (SEC), show that in 2014, senior executives made 949 times as much money as the average worker, far higher than the AFL-CIO’s ratio of 373:1.
.. But the average ARG compensation of the 500 highest-paid executives (as ranked by total ARG compensation) was $34.3 million, with 81 percent of that coming from stock-based pay.
.. Martin actually took home $192.8 million, and in 2015, when his total EFV pay was reported as $18.8 million, his actual take-home pay was $232 million.
.. Throughout the American economy, senior executives have become enamored with stock buybacks as a potent means of manipulating their companies’ stock prices.
Harvard Business Review: Profits Without Prosperity
Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.
.. Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices.
In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.
.. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive.
.. From the end of World War II until the late 1970s, a retain-and-reinvest approach
.. in the late 1970s, giving way to a downsize-and-distribute regime
.. Since the late 1980s, the largest component of the income of the top 0.1% has been compensation, driven by stock-based pay.
.. A turning point was the wave of hostile takeovers that swept the country in the 1980s. Corporate raiders often claimed that the complacent leaders of the targeted companies were failing to maximize returns to shareholders. That criticism prompted boards of directors to try to align the interests of management and shareholders by making stock-based pay a much bigger component of executive compensation.
.. The result: Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation.
.. There are two major types: tender offers and open-market repurchases.
.. Tender offers can be a way for executives who have substantial ownership stakes and care about a company’s long-term competitiveness to take advantage of a low stock price and concentrate ownership in their own hands. This can, among other things, free them from Wall Street’s pressure to maximize short-term profits.
.. Exxon Mobil, by far the biggest stock repurchaser from 2003 to 2012, can buy back about $300 million worth of shares a day, and Apple up to $1.5 billion a day. In essence, Rule 10b-18 legalized stock market manipulation through open-market repurchases.
.. the reality is that over the past two decades major U.S. companies have tended to do buybacks in bull markets and cut back on them, often sharply, in bear markets.
.. companies that do buybacks never resell the shares at higher prices.
.. when a company buys back shares at what turn out to be high prices, it eventually reduces the value of the stock held by continuing shareholders.
.. Warren Buffett wrote in his 1999 letter to Berkshire Hathaway shareholders. “Buying dollar bills for $1.10 is not good business for those who stick around.”
.. A related issue is the notion that the CEO’s main obligation is to shareholders. It’s based on a misconception of the shareholders’ role in the modern corporation.
.. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders’.
The only money that Apple ever raised from public shareholders was $97 million at its IPO in 1980. Yet in recent years, hedge fund activists such as David Einhorn and Carl Icahn—who played absolutely no role in the company’s success over the decades—have purchased large amounts of Apple stock and then pressured the company to announce some of the largest buyback programs in history.
.. MSV as commonly understood is a theory of value extraction, not value creation.
.. Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012.
.. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.
.. For example, during that period the amount of stock taken out of the market has exceeded the amount issued in almost every year; from 2004 through 2013 this net withdrawal averaged $316 billion a year. In aggregate, the stock market is not functioning as a source of funds for corporate investment.
.. large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average.
As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a company’s stock price falls, the board stuffs even more options and stock awards into top executives’ packages, claiming that it must ensure that they won’t jump ship
.. The vast majority of shareholders are simply investors in outstanding shares who can easily sell their stock when they want to lock in gains or minimize losses. As I argued earlier, the people who truly invest in the productive capabilities of corporations are taxpayers and workers.
.. Exxon Mobil, while receiving about $600 million a year in U.S. government subsidies for oil exploration (according to the Center for American Progress), spends about $21 billion a year on buybacks. It spends virtually no money on alternative energy research.
.. from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends.
.. If Americans want an economy in which corporate profits result in shared prosperity, the buyback and executive compensation binges will have to end. As with any addiction, there will be withdrawal pains.