The 'Low-Wage 100' spend more on share buybacks that enrich executives than on their businesses. Lawmakers are taking note.

By Ciara Linnane

A new report on the 100 S&P 500 companies with the lowest median pay finds the buyback machine is still in overdrive

The top U.S. companies with the lowest-paid workers - including fast-food chains, home-improvement retailers and consumers-goods makers - spend more on stock buybacks that create windfalls for executives than on investing in their own businesses, according to a new study published Thursday.

The "Low-Wage 100" - the 100 S&P 500 SPX members with the lowest median pay for employees - spent a staggering $522 billion on buybacks from 2019 to 2023, according to the study from the Institute for Policy Studies.

"At a time when our country is deeply divided on so many issues, Americans have enormous common ground on the problems of extreme CEO-worker pay gaps," said report author Sarah Anderson, director of the IPS Global Economy Project and co-editor of the IPS website Inequality.org. "Poll after poll shows that Americans across the political spectrum are fed up with overpaid CEOs and want lawmakers to take action."

Lowe's Cos. (LOW) led the pack on buybacks, which Anderson described as a "financial maneuver that artificially inflates CEO stock-based pay and siphons corporate dollars out of worker wages and long-term investments."

Before buybacks became such a popular tool in the 1980s, companies retained most of their corporate profits to reinvest in their own businesses or to reward their employees for their contributions to value creation.

That all changed when corporations started to buy back stock in droves, as a way to boost their share price by reducing the number of shares outstanding. That, in turn, changes the divisor for per-share earnings to bump up profit numbers. Many executives' salaries are based on profits and stock-price performance, and they are often rewarded with stock.

Opinion: The blowback against stock buybacks

Lowe's spent $42.6 billion on buybacks from 2019 to 2023, which would be enough to pay each of its 285,000 workers an annual bonus of $29,865 for five years, the study found.

Home Depot Inc. (HD), which ranked second to its smaller rival, spent $37.2 billion on buybacks, which would be enough to pay its 463,100 workers five annual bonuses of $16,071. Home Depot's median pay is just $35,131, putting its workers squarely in the low-income category.

In all, 47 of the Low-Wage 100 put more money into buying back their own shares than investing in capital improvements. The 20 largest employers in the group have spent nine times as much on buybacks as on retirement-plan contributions for employees, the study found.

AutoZone Inc. (AZO) had the biggest buyback/retirement-benefits gap, spending 92 times more on its own stock in the period than on employees' retirement security.

Chipotle Mexican Grill Inc. (CMG) ranked second, spending 48 times as much on buybacks as on 401(k) plans in the period.

To be sure, the average CEO/worker pay ratio at the Low-Wage 100 has improved; it narrowed to 603-to-1 in 2022 to 538-to-1 in 2023. Yet median pay remains extremely low at a time when many are struggling to make ends meet.

Ross Stores Inc. (ROST) had both the lowest median worker wage and the widest pay gap, the study found. Chief Executive Barbara Rentler took in $18.1 million in 2023 - or 2,100 times as much as the $8,618 that went to the retailer's median compensated worker, a part-time store associate.

Nike Inc. (NKE) had the group's biggest compensation package, with CEO John Donahoe raking in $32.8 million in 2023, or 975 times as much as the sports-apparel company's $33,646 median pay.

The study highlighted three areas of policy reform that are gaining some traction with lawmakers: taxing and restricting buybacks; subjecting companies with excessive levels of CEO pay to higher tax levies; and using federal contracts and subsidies to discourage wide pay gaps.

"By encouraging big companies to narrow their pay gaps, the [Biden] administration would also help ensure that taxpayers get the biggest bang for the buck for federal contract dollars," Anderson wrote. "Studies have shown that companies with narrow gaps in CEO-worker compensation tend to perform at higher levels than firms with wide gaps."

The study echoes themes found in "Investing in Innovation: Confronting Predatory Value Extraction in the U.S. Corporation," a book published last year by William Lazonick of the University of Massachusetts Lowell, who is also president of the Academic-Industry Research Network.

Lazonick is a longtime critic of buybacks, which he calls a key plank of "predatory value extraction."

Predatory value extraction is defined as the practice in which senior executives, Wall Street bankers and hedge-fund managers extract far more value from the corporations they are invested in than they contribute.

Read: Stock buybacks spur wealth inequality and stifle innovation. Should they be banned?

-Ciara Linnane

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-30-24 1256ET

Copyright (c) 2024 Dow Jones & Company, Inc.