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Comment by harperlee | Hacker News Reader

They should then be compensated with a leveraged long-term derivative product that pays based on the stock difference between their company and the industry, 5 to 10 years apart.

"You want to be insanely rich? Here's a huge company that's not yours as a resource, now make it so it is the best one in 10 years!"

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I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "normal boring" things literally doesn't pay. It's one of the main arguments for stock compensation because if the company does poorly, the CEO directly feels it where it hurts (the wallet).

And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.

You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.

Dividends ought to not be at a tax disadvantage over capital gains for this reason.

The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends.

If I don't need the money, I can just let it continue to grow tax free.

Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.

You still have the one year of dividends taxed at the short-term rate, since dividends are taxed on disbursement whereas capital gains is only taxed on stock sale.

Dividends are taxable at the time of distribution; the price effects of a buyback are taxable when shares are sold [1], and delayed taxes are preferable to immediate taxes.

[1] unless the holder has elected for trader tax treatment, in which case shares are marked to market at the end of the tax year

>You need profits for stock buybacks.

You merely need capital. Lots of buybacks are funded by debt

This is pretty insane actually. Is there a common metric that captures which companies are funding buybacks with debt? or is it easy to figure out? I am not a finance person.

If the long term debt increases during a period of buybacks, particularly more than net income, than yeah this is the case. And yes that happens.

BTW, this is exactly what private equity companies do when they take a company private. They borrow a lot of money to buy the outstanding stock. Often the company they are buying with debt (held by the company) is not profitable. And sometimes the company goes bankrupt.

So yes this happens.

With interest rates as low as they are (on both government backed and corporate investment grade bonds) and a reasonable forecast of higher inflation ahead, why shouldn't companies borrow for a variety of corporate activities, both operational and treasury?

They should, and they should use the money to do the corporate activities you mentioned.

No. But it's generally common knowledge. Here are some articles

https://fortune.com/2019/08/20/stock-buybacks-debt-financed/

https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...

https://crsreports.congress.gov/product/pdf/IF/IF11393

From the last one: "Data on the percentage of buybacks that are leveraged are inconsistent. For example, the bank J.P. Morgan Chase reported that leveraged buybacks accounted for 14% of overall buybacks during 2018, which it said was the lowest percentage since 2009. But Yardeni Research, a respected securities market research firm, reported that they were 56% of the total."

this is another one of those things you learn in business school, a commonly disdained yet imminently useful education, particularly for engineers.

> funded by debt

Or recently, government support packages.

Which is debt.

Leveraged buybacks reduce the multiple. It’s not a cheat code to make your stock go up.

A lot of the companies getting into debt have their own cash reserves.

I think most criticism of buybacks would go away if we eliminated the capital gains tax and treated income equally regardless of where it comes from.

Strictly no. You need "free" zero interest money from the Fed! That's how MOST stock buy-backs are financed - it going onto the balance sheet as debt which someday will bite them.

This is the shitty side of many modern CEOs. But the legal and tax incentives combined with Wall Street demands create the environment for it.

The only reason I dislike stock buybacks is that they encourage "riding" the bull market. Number goes up, people buy into the company, company does a stock buyback to keep the momentum, numbers go up even further, even more people buy into the stock, none of them caring about the actual company they are buying into, they just see the numbers.

Dividends are boring, we need more boring companies doing boring productive work.

Replace option contracts with RSUs or a vesting cliff and see how closely that resembles the VC fiefdom

this all sounds a lot like CEO talk to me...

I mean

Just make a contract to pay them a decent amount of the company doesnt go tits up

The problem is that the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative, and you don't want your CEO bailing to a different company the moment that some macro event (semiconductor shortage, new competitor, global pandemic, etc) comes along and alters the long term upside of your company.

You want a CEO who is going to stick around and make the best possible decisions to improve the company's trajectory, even if that mostly means keeping the company flat as opposed to faceplanting.

> the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative

You could develop a financial services company selling hedges for that risk to CEOs/executives?

> alters the long term upside of your company

I don't see how this is worse than short-term stock compensation

> I don't see how this is worse than short-term stock compensation

The CEO has an incentive not to destroy the existing value in pursuit of large gains. With compensation based on the industry spread, they may as well risk any existing value as it is worthless to them.

Currently: A CEO who does nothing but keep the stock price where it is would get 2 million. If he performs as well as average, he might get 4 million. If he beats the industry, he gets 6 million.

With leveraged spread system: A CEO who does nothing but keeps the stock price stable gets 0. A CEO who performs as well as industry gets 0. If he beats industry, he gets 6.

> The problem is that the best CEOs might not go for that.

We created that system, we can change it. CEO entitlement is part of the problem because it has become burned into our culture that they are demigods. They are not.

Ever worked for a company with a truly garbage CEO?? Good heavens, when you’ve got a moron there, you might as well be an air traffic controller at asshole airport.

Wouldn't it only make sense to gamble away the company in that scenario? Heads you win and the options pays out big, tails bankruptcy, but the option is worth the same as if you just did mediocre (worth nothing).

Isn't part of the problem the overlap between action and effect?

I might join a business as CEO and it does really well for 5 years because of the previous CEO, I could claim that it is my leadership and ask for my bonus.

On the other hand, maybe I do well but my successor is an idiot and makes the company tank so now I won't get my 10 year bonus because they screwed it all up.

Unless your idea only works for CEOs who are prepared to stay for 10 years? That then brings in the complication of when you need them to leave quietly because they are rubbish but you don't want your shareholders to know!

this is the problem with any leadership position in general, congress, president.... etc

I think the best way to address this is to provide standardize kpi monitoring.

When a measure becomes a target, it ceases to be a good measure

Especially for a CEO, who has quite a bit of power to optimize for any measure, it's going to be very hard to craft a measure that gives the results you want and can't be gamed. The most likely outcome is something that's just a worse version of the stock price, because the stock price is just a forward-looking approximation of net income, which is what you'd mostly want to optimize for anyway (ignoring things like B corps).

what makes you think this isn't already the case? CEO comps often include stock options.

If you prevent CEOs from selling their stock for the next X years, sure.

Isn't that also usually the case? There's generally a vesting period.

So what incentive does that CEO have to be cautious with my capital?

That just encourages extreme risk.

I find this statement strange. Curious if others experience aligns with mine:

Being a CEO is all consuming.

You don’t want to be a parent and a CEO, cause the company comes first.

You don’t want to be married and a CEO, because the company comes first.

If you could “automate” this job, the developers behind the scripts become de facto CEO. Their scripts cannot fail. They will have to make the same sacrifices as the meatspace CEO.

I dunno if it’s an Icarus thing or what, but the closer I am in interactions with ceos, the more I pity them.

Asking these people to trade their lives for the possibility of no payout seems doomed to fail. The only reason people trade their lives for this role is because it is worth the personal damage and risk.

When I worked in the game industry QA folks were regularly asked to put in twelve to sixteen hours a day - they're sacrificing their health and lives for their jobs but without any promise of payout. Ditto for pretty much anyone else working on the bottom 3/4ths of the economy.

My immediate reaction is the diff between CEO and QA is that QA doesn’t negotiate well.

They’re willing to endure bad work for limited pay. You don’t want this type of person leading a company.

I’ve also worked (and left) the field of gaming QA. FWIW, I’m not trying to being controversial- this is my sincerely held belief. I think gaming QA is a good foot in the door to a career in tech, but something that should be abandoned as soon as you get a feel for what it takes to work in an agile environment and make your deliverables. The gaming industry seems like the place where you go to kill your health and happiness to me. As long as people keep signing up for the work, conditions will be awful.

I would suggest a different take-away, it takes power and stability to negotiate power. Basically, you need to have a powerful position to gamble on securing better compensation. If minimum wage were a problem unique to QA[1] then that explanation might ring true but I think the fact that you see the same pattern of exploitation in fast-food and the service sector at large paints a clearer picture that our educational system is just failing to teach people they have personal value.

I do agree that the difference between a good CEO and a terrible CEO can be pretty stark - but I also think that the best CEO can't turn around a company rife with nepotism and other organizational diseases - the plebs contribute a lot more to company health than they're given credit for... That's my primary source of disagreement on CEO compensation - everyone else is being undervalued and so the creation of value is being misattributed to a CEO. The CEO should probably be the highest earner at nearly every company - but only rarely should the CEO earn five or six times that of someone in the mail room and we shouldn't see the 200:1 ratios that are relative common today[2].

1. It does have a unique exacerbating factor, every year a bunch of new grads think "Oh man, video games - I want to work on those" and thus there's a large pool of people willing to be paid peanuts to work in the field. This causes the experienced QA folks to have their labour devalued to compete with the large pool of free labour. I very much agree with your last few sentences - that's what seems to be the take-away for the gaming industry for me as well.

2. A random study - I know the numbers are in this ballpark but I'm not familiar with the specifics https://www.epi.org/publication/ceo-compensation-2018/

They should be compensated however their board says they should be compensated. You don't get a say in that.

I could say that all German people should wear purple shirts. It doesn't much matter unless I have a proposed method to enforce it.

All incentive models for ceos miss the point, that incentives do not work. People will just fulfill the metric, without incentive most people will do what is best for the company.

The issue is what if the CEO refuses. If he's good at his job or the business is in need he could always go to a different company and get paid what he can negotiate for.

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