
Profits Without Prosperity (2014) - 0x4f3759df
https://hbr.org/2014/09/profits-without-prosperity
======
breakyerself
I did some back of the envelope calculations on Boeing in 2015. The spent
about $86,000 per employee on buybacks and dividends. Just a year after strong
arming the union out of their pension out of a supposed desperate need to
compete with airbus. I really doubt airbus has lower employee overhead than
Boeing.

~~~
alexasmyths
To boot, they are the beneficiaries are massive, pork-laden propped up
government defence contracts - and massive 'investment incentives' from
states/municipalities like Seattle etc. who give them massive tax incentives
etc. to build plants in their state.

------
face_mcgace
A) So, wages are stagnant or falling and unemployment (real unemployment) is
at 10%.

B) Companies reinvest in themselves through buyback and lobbying congress for
subsidies. They freeze wages and reduce their workforces.

C) Congress subsidizes their research and development through tax payer
funding. Costing a higher tax burden during which wage rates are falling /
stagnant.

If B relies on C, and C relies on A, but A is destroyed by B - then what
happens?

~~~
face_mcgace
Spoiler: A will collapse, C will collapse, B will give themselves parachute
payments and move to China (companies will tank of course).

------
andrewjl
The lack of prosperity is due to only top management receiving compensation in
stock. What if legislation existed that mandated some percent of an employees
pay must (if said employee chooses that is) be in the form of stock for
publicly traded employers?

I understand that it's still peanuts compared to the structural imbalances at
play here. More of a first step.

~~~
lostboys67
Well you mandate the all employees must have access to the same share option
plan on the same terms that the executives do would be a start - this would
stop the abuse complex LTIP for the board.

Or maybe mandate that PLCs can distribute a certain amount stock tax free to
employees say $2000 per anum

~~~
andrewjl
Exactly. The same terms that the executives do part is crucial.

------
sjg007
The simple argument is that you can buy back shareholders and not increase
wages or pay people more in the pursuit of greater innovation and/or
productivity.

------
banned1
It is true that earnings management is an issue. The histogram of earnings %
shows a discontinuity when earnings are negative but approaching zero, [1]
which shows that managers will artificially inflate earnings to show a
positive earnings per share.

But I find the idea of short-term-ism in managing profits a little counter to
the goals of managers. Presumably, managers are motivated to stay in the job
and make more money for themselves, and would do a calculation between short
term and long term investment.

>>> “It concerns us that, in the wake of the financial crisis, many companies
have shied away from investing in the future growth of their companies,”
Laurence Fink, the chairman and CEO of BlackRock

This may be related to the complexity of driving returns that exceed the cost
of capital by a sufficient amount, one that would be within the range that the
company and their shareholders find palatable.

If people think that these companies should not be buying back their stock and
instead invest them in growth opportunities, maybe this means that these
opportunities exist for others to take advantage of. But the author does not
mention that other companies do that. It somehow places the risk and
responsibility of investing in the company that has the cash.

I think the issue is researches who spend too much time [2] sitting at their
fancy desks and protected by grants or tenure. Maybe they should leave and
actually go out there and start a company.

[1]
[http://www.scielo.org.za/img/revistas/sajems/v19n1/02f01.jpg](http://www.scielo.org.za/img/revistas/sajems/v19n1/02f01.jpg)

[2]
[https://en.wikipedia.org/wiki/William_Lazonick](https://en.wikipedia.org/wiki/William_Lazonick)

~~~
b1daly
Maybe I’m missing something amid all the technocratilly minded discussions on
the virtues of paying dividends vs stock buybacks vs the issue of whether the
profits of a company are more efficiently used to fund new investment compared
to returning profits to shareholders (one way or another) so they can
reinvest.

I thought the broader point was that successful companies are amassing
profits, derived, presumably, from overall increased productivity.

But instead of sharing this surplus equitably amongst all the employees, by,
for example, raising wages, executives are engaging in strategies that
increase their share of the surplus, and possibly the shareholders share, at
the expense of the lower level workers.

------
partycoder
Stock buybacks are also a credible way of showing confidence in times of
uncertainty or doubt.

------
btown
The article makes some great points, and more people should read about
Piketty's research on wealth concentration. But it buries the fact that
buybacks have actually been decreasing by certain metrics [0].

Granted, much of this slowdown is due to Apple waiting for tax law changes
before moving money around. But an article that uses six-year-old statistics
as its lede, but doesn't even reference recent trends, should raise red flags
about its impartiality.

[0] [http://www.marketwatch.com/story/sp-500-buybacks-have-
droppe...](http://www.marketwatch.com/story/sp-500-buybacks-have-dropped-
by-25-since-the-first-quarter-of-2016-2017-09-18)

~~~
vitus
Worth noting: article is from 2014. It's unfair to ask it to cite trends that
started after the date of publication (and likely after the finalization of
the research, which probably dates closer to 2012, the cited end date in the
article).

~~~
btown
Ah! I've been so spoiled by the moderation on HN that when I see an article
that doesn't have e.g. (2014) in the title, I assume it's recent! You're
absolutely right.

------
troydavis
How about changing the HN title to match the page (“Profits Without
Prosperity”), rather than 0x4f3759df’s editorialized version (currently “Stock
buybacks as a mechanism to depress wages and increase CEO pay”).

~~~
Avshalom
“Stock buybacks as a mechanism to depress wages and increase CEO pay”

Is what the article is actually about. "Profits Without Prosperity" is by
comparison cryptic and uninformitive.

~~~
troydavis
Either of our preferences aside,
[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)
is clear:

> Otherwise please use the original title, unless it is misleading or
> linkbait.

------
Analemma_
Paying CEO’s most of their compensation in stock was a theoretically sound
idea when it was made— after all, shouldn’t their pay be linked to
performance?— but one that should be abandoned now that the empirical results
have shown what it mess it has really been. It encourages tax and stock
shenanigans like this in favor of real investment, further prioritizes short-
term thinking, and is just generally useless since there connection between
CEO performance and stock price has been shown to be tenuous even without the
manipulation.

Let’s go back to paying CEO’s purely in cash with an annual performance bonus
decided by the board.

~~~
banned1
"Let's"? Maybe you can start your own company with your own funds and do that?

~~~
skinnymuch
The person you replied to is just trying to get a conversation and some
potential pressure started. No need to instead be so aggressive and expect
them to become a rich CEO.

------
fjsolwmv
The article is politically motivated nonsense.

The author admits he wants to force companies to invest their profits in
expansion instead of paying back shareholders, because he claims they have an
obligation to maximize their wages and taxes paid.

If stockholders were never allowed to realize a profit, why would anyone ever
buy stock at an offering?

The author sneers at icahn for not buying at the IPO, ignoring that icahn is
making good on the implied promise that IPO investors would get to eventually
cash out.

~~~
fred_is_fred
AMZN is a pretty good counter example of a company that invests in itself and
it's workers rather than spend on stock buybacks or dividends. Surely someday
in the future shareholders of AMZN will realize a profit!!!

------
mathattack
Here's another explanation. After companies get to a certain size, they can't
deploy capital as efficiently. The low hanging fruit is gone, they have more
principal-agent problems, and lots of waste.

The responsible thing to do is give it back to shareholders who can invest it
in countries and enterprises that generate a better risk adjusted return.
Boards invent the CEOs to do this rather than waste capital.

~~~
skybrian
I know what you mean but I'm not sure I'd throw "waste" around so casually.
Wages are not waste, from the employee's point of view. From a utilitarian
point of view, it's not at all clear that the money would be less "wasted" if
given to stockholders.

~~~
chillydawg
Of course wages are not waste. Corporate mergers for purposes of CV building
and vanity are waste, and are the hallmarks of a company sitting on too much
cash. Run your business properly and give any surplus profits to the owners.

~~~
notfromhere
The trend has been to both squeeze wages and engage in corporate buybacks,
usually with the justification that the company can't afford to raise wages
(which is obviously bullshit given how wastefully profits are used)

------
adrianratnapala
Well the article's fundamental worry is right: labour's share of revenue has
shrunk compared to the share taken by capital (and also high-level executive
type employees). And this causes, or is at least related to, problems with
society as a whole.

But he makes no real case that buybacks are driving this. So if some
politician wanted to go on a populist anti-buyback campaign, this article
would be useful to him. But as an attempt to actually address the problems it
highlights, it looks more like a distraction.

~~~
chumali
Actually, both capital and labour shares of output have seen a relative
decline at the expense of profits. [1]

Conventional theory suggests this would occur under conditions of increasing
market power. Most of the symptoms of this (of which decreasing investment is
one) can already be witnessed. [2]

It seems therefore that the increase in share buybacks is simply one of the
symptoms of the overarching market concentration narrative. Monopolists have
little need to invest/innovate due to lack of competition and are therefore
free to commit resources to price manipulation or further increasing their
market power.

In this context any anti-buyback campaign would prove ineffective unless
carried out alongside policies designed to limit market concentration and
increase competition.

[1] [https://promarket.org/responsible-declining-labor-share-
outp...](https://promarket.org/responsible-declining-labor-share-output-
michael-porter/)

[2] [http://noahpinionblog.blogspot.co.uk/2017/08/the-market-
powe...](http://noahpinionblog.blogspot.co.uk/2017/08/the-market-power-
story.html)

~~~
adrianratnapala
_Actually, both capital and labour shares of output have seen a relative
decline at the expense of profits. [1]_

What am I missing here. I thought "profit" simply was a shorthand for
"captial's share of revenue". I tried to understand the definitions at the
promarket.org link but couldn't make sense of them.

I _think_ what you are saying is that profits are being increasingly being
derived by barriers to entry. That makes sense, but still those extra profits
are going to be counted as captal's share of revenue.

~~~
specialist
Profit is the surplus. How that's paid out (investors, labor, government,
management/execs, etc) is another matter.

------
kanwisher
Nope. Stock buy backs are a tax efficient way of giving dividends. The stock
rises in price instead of issuing the dividend. So for me the owner of the
stock I don’t have a tax event for holding. The whole reason to own stocks, is
to realize profit from ownership.

~~~
blankley
The author does address this. "Some people used to argue that buybacks were a
more tax-efficient means of distributing money to shareholders than dividends.
But that has not been the case since 2003, when the tax rates on long-term
capital gains and qualified dividends were made the same."

~~~
Scoundreller
Not all shareholders are USians.

As a Canadian, US dividends get taxed like full-income. Capital gains get
taxed just like Canadian capital gains: at one-half the income tax rate.

In one of our tax-free savings vehicles: the tax-free savings account, capital
gains would be tax free, but dividends are still stuck with IRS withholding
taxes of 15-30% of dividends.

------
flint
Simple fix: 6% Ten Year Treasury...It would also resolve the vanishing
productivity growth problem.

~~~
skinnymuch
How would it resolve the vanishing productivity growth problem?

------
Animats
(2014)

This is the Harvard Business School Review. When HBR says something that
increases CEO pay is a bad idea, it almost certainly is.

Stock buybacks are an incredibly inefficient way of increasing CEO pay.
Especially if they involve taking on debt.

We need to tax corporate dividends, interest paid, and stock buybacks at the
same rate. There's a bias against dividends and in favor of debt in tax law,
and that's why companies take on so much debt. It's a subsidy program for the
banking industry, which is why it's hard to change in the US. It doesn't
particularly help non-financial corporations.

Also, "private equity" is mostly debt financing in disguise. It's not people
putting up their own cash. There's usually a little cash, and a lot of debt.

Something worth realizing: relative tax rates between business alternatives
have a large effect on corporate behavior. Absolute tax rates, not so much. As
capital gains rates have gone up and down over the years, capital expenditures
haven't followed.

~~~
skinnymuch
> Something worth realizing: relative tax rates between business alternatives
> have a large effect on corporate behavior. Absolute tax rates, not so much.
> As capital gains rates have gone up and down over the years, capital
> expenditures haven't followed.

Maybe it's late and I'm not getting it. What does this mean exactly. Like the
point of pointing it out?

~~~
dfabulich
When people raise Animats' argument, the beneficiaries of the relative tax
rate imbalance typically make an argument like: "Oh, you couldn't _possibly_
increase the tax rate on interest paid. Any absolute increase in the tax rate
will make corporations refuse to borrow, ruining the economy."

Animats was attempting to anticipate this argument with a counter argument:
corporations don't seem to care what the absolute tax rate is; they only care
what that rate is relative to the alternatives. So we should feel free to set
all of those tax rates equal, raising taxes on interest paid.

~~~
Animats
I'd argue that we need to tax corporate dividends, interest paid, and stock
buybacks at the same rate. That rate could be set to be revenue neutral.
Dividends taxed less, interest and stock buybacks are taxed more.

All the ways businesses pay for their capital should be taxed at the same
rate.

~~~
igravious
Interesting.

Would there be any other avenues available or would your solution be all that
is needed?

But isn't this missing the forest for the trees anyway?

To use an aquatic metaphor, isn't this like plugging a leak in a dam with your
finger when the entire structure is unsound and needs re-engineering?

~~~
chillydawg
The instability comes from piles of biases created by rules, exactly like
this. Addressing these biases and correcting clearly ridiculous incentives
will slowly correct overall behaviour, if enough rules/rates/whatever are
tweaked in a better direction.

------
blakesterz
"Consider the 449 companies in the S&P 500 index that were publicly listed
from 2003 through 2012. During that period those companies used 54% of their
earnings—a total of $2.4 trillion—to buy back their own stock, almost all
through purchases on the open market. Dividends absorbed an additional 37% of
their earnings."

That's shocking, is this is a case of lying with statistics somehow? That
paints such an ugly picture that I can't believe it's the first time I've
heard anything about it.

~~~
xbzbanna
What do you find shocking about it? There is a big moral question about
corporate profits vs. wages. But given that some portion of revenues become
profits, they are either going to turn into a corporate cash hoard, dividends,
or buybacks. I don't see anything shocking about choosing a buyback over the
other two choices. After all, when a company takes investor money in a public
offering, the idea is that the money will eventually be returned to investors,
plus a profit if possible. A buyback is one way to close out the deal with
some of those investors and return that money.

Edit:

Also, I think there's a bit of funny math here possibly contributing to a
misunderstanding when the article says things like this:

> During that period those companies used 54% of their earnings—a total of
> $2.4 trillion—to buy back their own stock, almost all through purchases on
> the open market. Dividends absorbed an additional 37% of their earnings.
> That left very little for investments in productive capabilities or higher
> incomes for employees.

By definition, wages don't come out of profits. A company could increase wages
by $1 billion, have $1 million profit, do a $1 million buyback, and then a
journalist could write an article saying "company spends 100% of profit on
buyback, giving none of it to workers."

In reality, many companies have a large cash hoard which is not going to
employees or investors. Doing a buyback in those circumstances (notable recent
examples include Apple and Facebook) doesn't have any effect on employee
wages.

~~~
koolba
Stock buybacks have a distinct advantage over dividends: _they 're not
taxable_

Done correctly, it’s a synthetic dividend without the immediate tax burden on
the shareholders. Those that want to cash out, can sell a portion of their
higher priced shares.

~~~
xbzbanna
IMO, there's an injustice here when things like stepped-up basis result in
these gains never being taxed, but that seems like a separate issue from the
question of wages vs. profits.

To be explicit, there is a decision tree where a company can decide whether to
have wages increase or profit, then decide what to do with the profit, and the
rise of stock buybacks vs. dividends is an answer to the second question, not
the first.

~~~
koolba
They are taxed. They’re just not double taxed.

The corporation pays corporate taxes on the money used for the buyback. The
investors taxed are avoided because they haven’t realized their gains. When
they eventually sell their shares they pay taxes.

~~~
xbzbanna
If the company made the money from selling beer, it was triple taxed due to
the alcohol tax! Wait, if the customer paid for the beer with earned income,
the beer was quadruple taxed. But if he paid for the beer with dividend
income, it was quintuple taxed!

In the stepped-up basis case I mentioned, the investor may never pay taxes on
the gains.

