Today Eric Reguly of the Globe writes about something that I have been commenting on for almost three years in an article entitled The trillion-dollar buyback threat in which he finally acknowledges why CEOs are so loathe to give up the corporate model (in favour of other shareholder models like the income trust model), which is the practice of corporations engaging in share buybacks for reasons motivated by how these CEOs are compensated, namely stock options.
In summary, share buybacks do nothing to add economic value to a corporation and yet trigger artificial gains in a corporations “earnings per share”, which is the imperfect measure by which the market assigns value to corporations. To the extent that share buybacks can artificially inflate the value of a company, then CEOs who are compensated by stock option gains, will pursue stock buybacks till the cows come home, as opposed to generating increased earnings per share by actions that achieve REAL economic growth versus ARTIFICIAL growth
I am pleased that Eric Reguly has caught up with my preachings of the past three years by today writing: “The [ills of share buybacks] will not change unless the stock option-based compensation model is taken out behind the barn and shot.”
This is where the need for an enlightened politician comes in, as the initiative for taking stock option compensation out behind the barn and shot is not going to come from the boardrooms of Canada, nor is it going to come from John Manley of the CCCE, it needs to come from an enlightened politician who acknowledges that the tax treatment of stock option gains at half the rate of the income from employment that it represents is inherently unfair and inherently unjustified from a public policy perspective, since this tax loophole only serves to foster a situation and related practices that are counter to the well being of society, as made abundantly obvious by the root cause of the global financial meltdown namely executive compensation schemes that promote bad behaviour and undesirable outcomes.
Or are we going to pretend that there was no global financial meltdown and that no changes to the status quo are required?
A change in tax policy is what Eric Reguly and others should now be calling for, as I first wrote about in April in a piece entitled: Two POPULIST tax revenue increase measures for the Liberals
Just requires an enlightened politician?
Monday, August 24, 2009
Posted by Fillibluster at 7:45 PM