This Chart Shows How CEOs
Get Rich by Dumping Cash on You
7, 2015 — 5:00 AM EDT
Updated on July 7, 2015 —
5:00 PM EDT
Paychecks for CEOs
Buybacks and dividends are rising to
in the U.S., and for many chief executives, that means a fatter pay
check -- even if sales aren’t growing.
Eleven of the 15 non-financial U.S.
companies that spent the most on buybacks last year base part of CEO
pay on earnings per share or total shareholder return, or both,
according to data compiled by Bloomberg. These metrics get a boost
when businesses return cash to investors, giving companies like
International Business Machines Corp. and Cisco Systems Inc. added
incentive to dole out cash to stockholders.
Linking compensation to buybacks and
dividends can encourage managers to sacrifice funds that could be used
for long-term investments, economist William Lazonick said. It also
raises the prospect that executives are being paid for short-term
returns rather than running a business well.
“A lot of people are making money without actually creating value,”
said Lazonick, an economist who focuses on innovation and economic
development and has
about the economic effect of buybacks for the Harvard Business Review.
At IBM, almost 40 percent of CEO Ginni
Rometty’s $11.4 million compensation package last year was based on
operating earnings per share, according to the company’s
By contrast, Intel Corp., Hewlett-Packard Co. and Oracle Corp. don’t
use earnings per share to remunerate leaders.
from analysts and investors last year for what they considered
excessive share repurchases. The company returned more than $13
billion, the fourth-largest amount in the U.S., while it was
struggling to reinvent itself to a provider of cloud services. In 12
straight quarters of year-over-year declines in sales, IBM boosted
operating EPS in nine quarters -- with the help of buybacks.
The company has this year reduced
to about $6.3 billion in 2015, the lowest level in 11 years.
“There might be some distraction on the
incentive side,” said Todd Lowenstein, who helps manage $16 billion at
HighMark Capital Management Inc., which holds shares of IBM. “It’s
lopsided and skewed toward short-term EPS.”
Ian Colley, a spokesman for Armonk, New
York-based IBM, declined to comment beyond the company’s proxy
Tying pay to performance has long been
considered a shareholder-friendly move that gives executives an
incentive to ensure that the company is on solid footing. Investors
such as Warren Buffett have applauded payouts when they consider
shares to be undervalued. Large pension funds have welcomed pay
incentives, like when Walt Disney Co. in 2013 changed the way it
calculates CEO Bob Iger’s stock awards.
Yet dividends and buybacks can prop up
per-share earnings and total shareholder return -- lifting CEO pay as
a result -- even in cases where sales are falling.
The focus on shareholder value has “led
to this really corrosive feedback loop between executive compensation
and corporate behavior,” said Nick Hanauer, co-founder of venture
capital firm Second Avenue Partners LLC. “When everyone around a board
room can justify essentially any behavior to generate a higher stock
price, no stone shall go unturned.”
Johnson & Johnson shows that it’s
possible to use earnings per share as a metric, while capping the
impact of buybacks on the CEO’s paycheck. The drugmaker
share repurchases, as well as other one-time occurrences, from pay
calculations if they increase earnings per share by more than 1
Besides IBM, other technology companies
that use EPS to calculate executive pay include San Jose,
California-based Cisco and Xerox Corp. Like IBM, both posted sales
declines in their last fiscal years.
Outgoing Cisco CEO John Chambers, who
was paid $16.5 million in the
ended July 2014, also got rewarded for boosting total shareholder
return, which was added to his pay calculation since 2012.
Last fiscal year, Chambers doled out
$9.5 billion on stock repurchases, the eighth most of non-financial
American companies. Sales fell 3 percent in the period, the first drop
since the financial crisis, amid stiffening competition. Chambers will
this month, handing the reins to Chuck Robbins.
“Our compensation program is strongly
aligned with the long-term interests of our shareholders,” said Andrea
Duffy, a Cisco spokeswoman. The executive compensation philosophy and
practice is based on pay for performance, she said.
Sean Collins, a spokesman for Xerox,
said EPS is a major component used to calculate the price-to-earnings
ratio, which is widely used to value stocks by investors.
“Growth in EPS is an important measure
of management’s performance because it shows the bottom-line
profitability we are generating for each of our shareholders,” Collins
Topping last year’s list of share
repurchases, Apple Inc. spent $45 billion as Carl Icahn agitated for
the iPhone maker to return more cash to shareholders. The billionaire
his call for more buybacks this year, even as a debate has mounted
about whether the company has enough new, innovative products to drive
sales growth. Apple paid about $11.1 billion in dividends last year,
while spending $16 billion on
development and capital expenditures.
While Apple doesn’t use earnings per
share to calculate CEO Tim Cook’s pay, the company changed the
requirement for an equity award Cook received when he took over in
2011. After the change, a portion of the shares would only vest if
certain total shareholder return goals were met. Cook’s reported pay
in fiscal 2014, according to Apple’s
a year when he increased both sales and net income by 7 percent.
Josh Rosenstock, a spokesman for Apple,
declined to comment beyond the proxy statement.
Disney CEO Pay
After Disney shareholders including
California State Teachers’ Retirement System opposed CEO Iger’s 2012
compensation, the world’s largest entertainment company modified his
performance-based stock awards to ensure that earnings per share would
be part of the calculation.
As a result, half of Iger’s
performance-based stock award is based on meeting total shareholder
return goals relative to the Standard & Poor’s 500 Index, with the
rest contingent on earnings per share growth compared with the index.
The aim was “to ensure that the program meets the objective of
providing clear incentives tied to the creation of long-term
shareholder value,” Disney said in a 2013
Earnings per share now factor into both
short- and long-term incentives for Iger, whose reported pay was
last year. (Reported pay is disclosed in the U.S. Securities and
Exchange Commission-mandated summary compensation table, which may
include some awards in the year they’re granted rather than for the
year they’re earned.)
Disney spent $6.5 billion repurchasing
its own stock last year and more than $1.5 billion on its annual
dividend. Meanwhile sales grew 8 percent and net income surged 22
“The company’s capital allocation
strategy is designed to create growth opportunities through investment
in existing businesses or through acquisition, and to return excess
capital to shareholders via share repurchases and dividends,” David
Jefferson, a spokesman at Disney, said in an e-mail. “This balanced
approach has resulted in stellar financial results and created
significant value for our shareholders.”
Ninety-two percent of Iger’s
compensation is performance-based, Jefferson said.
for the top 350 U.S. firms by revenue has climbed to $16.3 million
last year, according to data from the Economic Policy Institute.
That’s up from $15.7 million in 2013.
Overall in 2014, non-financial companies
returned almost $1 trillion in share repurchases and dividends. As a
percentage of gross domestic product, that’s among the largest payouts
Not all investors are applauding the
BlackRock Inc.’s Laurence D. Fink, whose
firm is the largest shareholder in many large companies, recently
to S&P 500 CEOs, urging them to resist payouts to shareholders if it
compromises long-term opportunities.
“Corporate leaders’ duty of care and
loyalty is not to every investor or trader who owns their companies’
shares at any moment in time, but to the company and its long-term
owners,” Fink wrote in the April letter.
The inclusion of earnings per share or
total shareholder return in CEO pay is above average for the 15
companies that spent the most on buybacks last year. According to a
Towers Watson survey of 2012 proxy statements, one of the metrics, or
both, were included in less than half of short-term compensation plans
at Fortune 500 companies.
Amid a bull market, shareholders may not
be as concerned as they should about the potential boost that buybacks
and dividends can give to CEO pay, said Robert Barbetti, head of
compensation advisory for J.P. Morgan Private Bank in New York.
“Boards and compensation committees
should be thinking very carefully about the incentive plans and
objectives that work long term,” said Carol Bowie, head of Americas
research at proxy advisory firm Institutional Shareholder Services
Inc. “The real question for investors is: Is that use of EPS -- and
potential misuse of EPS -- driving pay packages and payouts that are
not really delivering solid long-term value?”