Stock Buybacks!™ and the Monetization of Stock-Based Compensation
November 9, 2022·30 comments
The circular process of issuing new shares to employees and then buying those shares back with company money - MY money as a shareholder - is called 'sterilization'.
Sterilization has been around forever, and to a limited degree it's fine. Yes, management teams should get some reasonable level of stock-based compensation. Yes, it may make sense to use some of my cash to sterilize those shares and keep the share count from expanding. But don't tell me that the sterilization of newly issued shares is anything other than a direct compensation expense that I am paying for with MY money. Don't tell me that the sterilization of newly issued shares is somehow a "return" of cash to ME, because it's just not. The sterilization of newly issued shares is a direct transfer of my money to YOU, the recipient of those newly issued shares. Nothing more, nothing less.
I believe that there has been a sea change in markets over the past ten years in the size and scope of these sterilizing stock buybacks.
I believe that there has been a truly astronomical transfer of wealth - well more than a trillion dollars - over the past ten years from shareholders of publicly traded companies to managers of publicly traded companies. Not founders, not entrepreneurs, not risk-takers ... managers.
I believe that this sea change has been driven by the intentional trumpeting of three narratives by management teams, boards of directors and their rah-rah Wall Street/CNBC accomplices:
- "Our Interests Are Aligned" to justify larger and larger amounts of stock-based comp,
- "Non-GAAP is the Best Way to Understand This Company's Fundamentals" to justify downplaying stock-based comp and share dilution as a crucial issue for investors, and
- "We're Returning Cash to Shareholders" to justify the sterilization of that stock-based comp with stock buybacks.
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