The AFL-CIO Equity Index Fund is shining the spotlight on companies whose CEOs stand to collect a bundle as a result of large stock buyback programs. In a stock buyback, a company buys its own shares to reduce the number of shares outstanding.
Big stock repurchases may prop up companies’ stock prices in the short term but hurt their survival in the long term by starving investments in capital equipment, research and development. These types of investments are vital for job creation.
The Equity Index Fund’s efforts come at a time when stock buybacks have risen to record levels in the United States. The S&P 500 index companies spent $553 billion on repurchasing their shares and $369 billion on dividends for the 12 months that ended June 30, 2015. That amounts to 109% of their earnings.
Many companies link their CEOs’ pay packages to earnings per share and other financial indicators that may get a boost when the companies repurchase stock. This practice rewards executives for financial engineering instead of rewarding growth.
To date, the AFL-CIO Equity Index Fund has filed shareholder proposals at 3M, Illinois Tool Works, Xerox and IBM, asking those companies to exclude the impact of stock buyback programs on the financial metrics on which CEO pay is based.
For example, 3M spent $5.7 billion on stock buybacks in 2014, more than three times what the company spent on research and development. 3M’s CEO, Inge Thulin, received $20.1 million, including $4.7 million linked to stock buybacks.