From yesterday’s Barron’s online:

His name is still on the door, but Charles R. Schwab has been on a selling binge of late when it comes to shares of the brokerage firm he founded 36 years ago. Mr. Schwab sold 800,000 shares of Charles Schwab for nearly $16 million this past Friday at prices ranging from $19.59 to $19.79, according to a Securities Exchange Commission filing.

The story continues:

Mr. Schwab’s sale came two days after his company announced an increased share-buyback plan, authorizing $500 million in additional funds for repurchases. As of the announcement, the company had repurchased 22 million shares since Jan. 24 for a total of $426 million.


Schwab (the company not Chuck personally) is spending roughly a billion dollars in employee compensation that isn’t really considered employee compensation. See, the company gives out stock to employees – it has recently given about 30 million shares of which Chuck personally received roughly 3 million. Then the company essentially buys the stock back from them when they go out and sell it in the open market.

“Why go through this elaborate compensation scheme?” you ask. “Why not just give out more cash?”

One reason is that it allows companies to hide the vast majority of their employee compensation costs (option grants are much more valuable than salaries and bonuses at nearly every public company).

Despite a huge outcry against it, accounting rules were recently changed to force companies to report option compensation as an expense. Still, companies with large option grants report “non-GAAP” earnings numbers that exclude it. Most analysts use this number as the companies’ official earnings and report on them as if the option grants don’t even exist.

For many companies, options expensing would wipe out earnings entirely. (FYI – this means that all the company’s earnings are going to employees; shareholders be damned.) It’s easier for brokers, who pay analysts’ salaries, to sell shares (aka generate commissions) of companies that are actually making money so it is also convenient for analysts to ignore options expense thereby ignoring Generally Accepted Accounting Principles.

It’s a boondoggle even Washington can admire: Chuck, the company, pays Chuck, the CEO, by diluting the shareholders and analysts conveniently ignore it. The plan works fine assuming the shareholders don’t revolt (by selling). Considering the current record highs in the stock market, I’d say it looks like the system has bred more than a few Numb Chuck shareholders:

LIV

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