How to create billionaires in the executive suite

"“Not widely known is that for many years after the Great Crash of 1929, the Securities and Exchange Commission (SEC) viewed buybacks as bordering on criminal activity,” Edward Yardeni and Joseph Abbott, of the independent firm Yardeni Research, wrote in their book, “Stock Buybacks: The True Story.”

The authors say the growth of buybacks is partly an unintended consequence of a change in the tax code in 1993 under President Bill Clinton that put a $1 million cap on chief executives’ salaries. Ever inventive, corporations accelerated the issuance of stock options and grants as a form of executive compensation.

As The New York Times has documented over many years, such grants have widened a pay gap with rank-and-file employees, creating billionaires in the executive suite.

When stock is issued this way to corporate executives and ordinary employees, the stake of existing shareholders is diluted. Say, for example, you own 1 out of 100 shares in a small company. After 10 new shares are issued to company employees, you will own only 1/110th of the company.

But the company remedies that dilution with buybacks. That prevents the value of your shares from declining. When the buybacks are greater — reducing the total shares to, say, 90 — the value of your shares increases."