Re ““Stung Twice by Lavish Pay at the Top” (Sunday Business, July 10, 2016) http://www.nytimes.com/2016/07/10/business/investors-get-stung-twice-by-executives-lavish-pay-packages.html?_r=0
Though I have a fair degree of sympathy for Gretchen Morgenson’s view that CEO pay is overdone these days, I was rather stunned by her acceptance and recycling of the faulty argument made by David Winters and colleagues in this article. Stockholders very well may get stung once by excessive CEO pay, but Winters absence of logic in his argument that stockholders get stung twice would have earned him an F in any accounting or finance class worth its salt. I fear that Ms. Morgenson’s zeal in her fight against what she considers excessive business executive pay has caused her to lower her defenses against faulty reasoning. Here is my letter to the editor. I hope that the NYTimes will do the right thing and call attention to their rather grievous error. My own letter to the editor e-mailed the morning of July 11 is copied below. I suspect that other finance/accounting types have commented similarly.
I share Ms. Morgenson’s concerns about excessive executive compensation. However, her reliance on David Winter’s assertion that a corporation faces a second round of costs when repurchasing shares to offset the dilutive effect of stock awards to executives is entirely misplaced. Mr. Winter’s argument represents a double counting of the costs in this situation. Perhaps Ms. Morgenson would have recognized this double counting had the order of actions taken been reversed, with shares purchased first, then awarded to an executive as compensation. Had the shares been purchased at a fair price and retained as “treasury stock,” the loss of returns on the money paid would be offset by the returns on the purchased stock, and the company would not be disadvantaged, as purchase of the company’s own shares is comparable to the purchase of shares of another company, i.e. a productive asset. However, when purchased shares are awarded to an executive, they redirect the returns from the shares away from the company to the executive. The costs to the company are essentially the same whether the company gives the executive $10 million in cash, $10 million worth of its stock, or gives the executive $10 million in cash with which the executive purchases $10 million in the company’s stock.
Robert L. Losey, Ph.D.