Apparently, many people think buybacks are an inappropriate use of corporate funds and should be banned when receiving a bailout, which is part of the passed Covid Bill. I do not have a problem with that portion of the bill; buybacks are appropriate when you have no better use of the money or when they make economic sense. If you need a bailout then now is not the time to buy back stock.
Yet the ideal time to buy back stock is when the price of your stock is low and grossly oversold, and the interest rates are at record lows; precisely the conditions we now experience. It supports the price of the stock which is good for the market and it provides cash to investors who can redeploy in other investments or consumption which has a much-needed stimulus effect. Buybacks are a way to keep money flowing to better needs and opportunities.
The problem with buybacks is a common bonus system for CEOs that aligns their bonus with the share price rather than improvements in market share, return on assets, efficiency or other metrics that are more conducive to long term success. If CEOs can persuade their board to use cash or cheap credit for buybacks, they have an incentive to do so to boost their bonuses. The problem is not the buybacks, it is the perversion of the incentive systems. Executives should just own shares like the other shareholders to be aligned with their interests. If the politicos wish to restrict abuses of the bailout funds the better avenue is to restrict executive compensation; a move I would normally highly object to, but these are challenging times.
During the Clinton years executive pay deductibility was restricted. The response from the corporate world increased executive compensation. The problem with regulations is that they create the need for more regulations. Simple solutions to complex problems are fraught with unforeseen and counterproductive consequences.
From The Washington Post:
“In 1993, Bill Clinton signed into law his first budget, which created section 162(m) of the Internal Revenue Code. The provision stated that companies could only deduct the first $1 million of compensation for their top five (later top four after changes by Bush’s SEC) executives from their corporate taxes. The idea was to discourage companies from paying in excess of $1 million, as any additional compensation would be taxed. So why didn’t it work?”
“According to a new paper from Temple University’s Steven Balsam published by the Economic Policy Institute, the big flaw in 162(m) was its broad exemption of “performance-based” pay. The $1 million cap only applied to traditional salaries, bonuses and grants of company stock. Stock options (that is, stock grants that take time to vest and are meant to provide a performance incentive to workers) and other performance incentives are considered performance-based pay and are deductible even in excess of $1 million. So, unsurprisingly, businesses started paying executives more in the form of stock options, such that fully 55 percent of deductible executive pay was “performance pay” between 2007 and 2010.”
When CEO bonuses were paid in 2008 after the bailouts America was justifiably outraged and it is reasonable to include conditions to avoid this outcome again. It is equally outrageous and irresponsible to load this bill with unrelated political swag and enforce long term changes in corporate governance and other purely political agendas in order to address a very short-term set of problems.