In a move which ties stock buybacks to the labor movement and other worker issues, the National Employment Law Project – a workers’ advocate group – in conjunction with the liberal Roosevelt Institute published a report which links spending on stock buyback programs to the flat wage curve of low-wage industries. Over the past three years, many reports have decried stock buybacks as preventing “proper” reinvestment by a company in worker compensation often cited as one of the missed reinvestment opportunities, despite research showing that buybacks are not measurably impacting investment This new report, however, is the first to focus exclusively on worker compensation issues and seeks to make a case that buybacks are not only ill-advised from a corporate management perspective but directly contribute to worker compensation stagnation thus perpetuating income inequality issues.
The report primarily discusses buyback activity at three industries which, due to market structure, typically have a lower paid employees – the Restaurant, Retail, and Food Manufacturing Industry. (Ironically, the report was funded through grants by the W.K. Kellogg Foundation and the Ford Foundation.) Key elements of, and arguments in the report include:
- Each of the three industries spent an extremely high percentage of net profits (which presumably already include reinvestment in the company) between 2015 and 2017 on share buybacks (Restaurant – 136.5%, Retail 79.2%, and Food Manufacturing – 58.2%). The report argues that companies in these industries could (or should) have used money spent on buybacks to increase worker compensation “instead of funneling gains up and out of companies to corporate executives and short-term-minded shareholders through stock buybacks.” For example, the report argues that the five companies spending the most on buybacks in the food manufacturing industry could have instead increased median worker compensation by an average of 79% by shifting funds used in buybacks.
- The report discusses buybacks in the context of growing wage disparities, citing SEC Commissioner Robert Jackson’s recent research to back its claim that executives use share buybacks to boost compensation. “[B]uybacks can serve as a Trojan horse for increasing executive and management compensation.”
- The report claims that proponents of buybacks “ignore the evidence” against buybacks. None of the actual positive aspects of buybacks are discussed nor are the reasons that companies make capital allocation decisions. Instead, the report instead states that investing in workers is a a better investment and that executives exploit buybacks for personal gain.
- The report suggests a return to dividends as a superior solution for returning cash to shareholders.
As for the solutions for stopping buybacks, the article discusses a range of options that are not likely to be implemented, from banning buybacks altogether to raising capital gains taxes to be “comparable with taxes on labor income” while requiring mark-to-market accounting, to taxing companies based on their pay ratios akin to the City of Portland.
As noted above, the report is not the first to link buybacks to worker compensation. However, the exclusive focus and the ties to the labor movement and issues, is noteworthy in light of greater interest on among Democrats on Capitol Hill in revisiting the SEC’s exemptions for insider trading that allow buybacks, and something to be aware of as the fall campaign season heats up.