We have another repeat of this idea that CEO pay is just terrible, terribly high that is, and that this leads to all sorts of errors and problems:
This is where the link to excessive CEO pay comes in. These complicated pay packages are structured to produce huge bonuses if share price targets are hit. The majority of shareholders are pretty impatient with businesses that do not deliver regular and repeated earnings increases over the short and medium term. The sort of long-term investment that might raise company performance many years from now, boosting productivity and wages for ordinary workers, is harder to push through. This in part explains why corporate Britain is notoriously sitting on a “cash pile” estimated to be as large as £700bn.
Instead of investing, what do corporate leaders do with all this cash? They pay “special dividends” to their shareholders, or buy back their own shares, thus boosting the share price and ensuring that their bonuses (so-called long-term incentive plans) will trigger a bonanza in two or three years’ time. That’s right: “long-term” is no more than five years away. Welcome to the dysfunctional world of high finance.
While the prime minister is in Japan this week, she may learn something about the patient, long-term support for investment and “continuous improvement” that helped build one of the most powerful economies in the world from the ruins of war. It is a country, incidentally, where the gaps in pay between corporate leaders and their employees are a mere fraction of what they are here.
The first problem with this comes in that middle paragraph. For there is an assumption that that cash paid out to investors in dividends or buybacks somehow doesn't do anything. Once it has fled the corporate coffers then that's it, gone.
Except of course that isn't what happens at all, the investors who receive it can do one of two things with it, spend it or invest it again (the number sticking it in a vault to bathe in being rather small). Investing again might well see it going into new and or small businesses, where more than all of the employment growth is, most of the economic growth and a very large part of the technological advance.
The second problem is in that last para - here is good research showing that Japanese companies do worse precisely because of the method of selection and payment of their CEOs.
The third problem being in the first. A share price is the net discounted value of all future revenue from the ownership of it. Boosting short term results at the expense of the long term therefore doesn't work - or shouldn't. At which point we need to test the idea. And as ever with a theory (let's pretend at least that we're talking about science here, not politics) all we need is one refutation to shoot it down. Do we have an example of a concentration upon that long term, at the expense of current profits and dividends, increasing the value of a firm, not decreasing it?
At which point our simple fact. Amazon. The company doesn't really make profits, certainly it has never made an economic one (accounting, yes, but the two concepts are a little different, an economic profit is one above the general return to capital), never paid a dividend and as far as we're aware stock buybacks are limited to the need to feed the stock options and awards program, no more. It is also, after a couple of decades of this behaviour, one of the most valuable companies on the planet. Its CEO one of the richest men on it.
The stock market rewards that investment for the long term. The CEO having stock seems to increase that focus on the long term, sacrificing current profits and dividends to invest further increases the share price.
The theory is wrong.