No Money for extra Salary, but Shareholders experience Wealth maximization

Introduction

Stock exchange listed companies such as Shell and Unilever are flush with money and are buying up their own shares. That is beneficial for the shareholders. Employees grudgingly see, however, that there is no money for more wages.

Shell, IBM, Unilever, Walt Disney, JP Morgan Chase, Chevron and Apple. It is only a small selection from the list of listed companies that purchased their own shares. And not in small numbers. For example, Shell bought EUR 25 billion of its own shares. Unilever for 6 billion. Equity is also involved with other listed companies. In the US, more than $ 1,000 billion in own shares were purchased by companies last year. 

What is happening here? Read more and find out why you get no extra salary, but there is cash for the shareholders. And if you do not like this, find the perfect way out.

Why buy your own shares?

Making money for shareholders is really the American answer. Serving the interests of shareholders, says UK law. That means making as much profit as possible and distributing a large part of it to shareholders. This is different in many European countries. In the Netherlands, management must pay attention to the interests of all its stakeholders.

Stakeholders being those entities or persons holding a share or interest in a company that can affect or be affected by an organization’s actions, objectives and policies. Some examples of key stakeholders are creditors, directors, employees, government (and its agencies), owners (shareholders), suppliers,unions, and the community from which the business draws its resources.

Shareholders are important, but not the most important. A shareholder (also stockholder) is an individual or institution, including a corporation,that legally owns one or more shares or stock in a public or private corporation. Shareholders may be referred to as members of a corporation. So, why the focus?

Buying shares is popular 

The reason is simple. Companies will generally have more money than they need and they want to return that to the shareholder. That is fine in itself. Cash must initially be used for investments and possible acquisitions. But that must be profitable. In addition, a company must maintain a buffer for bad times. And then the shareholder comes into the picture. After all, they invested in the company. But is it logical to only take care of them?

Giving money back

That period has now arrived. Some companies swim in money now that it has been doing well with the economy for a few years. They have so much that they can not invest it all anymore. And they do not want to throw away money by doing too expensive acquisitions. So the money goes back to the shareholder.

You can do that in two ways. You give a higher dividend or you buy your own shares. The company has to withhold taxes on dividends, so part of the profit will go to the tax authorities. For the purchase of own shares, there is generally no need to settle anything with the tax authorities. So, there you go, it is a tax issue and thus companies buy their own shares.

Increase in share earnings

The logic behind the purchase is that there are fewer shares left in the market. The profit therefore needs to be divided over fewer shares. The earnings per share will then increase and that is favorable for the share price and therefore the shareholder.

The fact that companies give the surplus cash to the shareholder is no more than logical. After all, they have made risk-bearing capital available to the company. They are rewarded for that. But again, why only them?

Criticism on this reasoning

Some people say this needs to change. They want staff to benefit also from the rising profits of companies by giving them a wage increase. They claim that companies make high profits thanks to the low wages of the staff. In the past twenty years, employees have received an ever smaller share of the cake. They want employees, who are stakeholders as well, to have a say in the distribution of profits. The shareholders take off with the money, the employees get a higher energy bill. That sounds not correct.

Others doubt this approach and say:  Why do you have to pay employees more than market wages? Good employees who are decisive for success get a real salary increase, or they switch to the competition. They argue that companies invest more money in internal training. That is good for the company and for the employee. 

To my opinion this is beside the point as they did not talk about salary increase but a share of the profits that they have contributed to, like a 13th month, a bonus or similar.

More criticism

Criticism also applies to the purchase of own shares from a completely different angle. This could lead to capital destruction for the shareholder. In itself it is fine that excess cash goes back to the shareholder. But often, shareholder value is often destroyed with purchasing. 

That has to do with the timing. Companies buy shares when they have money left. And that is usually in times that things are going well. And if the company is doing well, the price is high, so the companies buy their own shares for a relatively large amount of money.

And they just issue shares if things go bad. This leads to hefty capital destruction. Here is an example. Experts point to the ING (Dutch bank) which bought five billion euro shares for 2008. When the credit crunch erupted, the company had to spend another 7.5 billion euros on new shares at a much lower price.

Another example

We thought we had learned something from this crisis, but the opposite is true. Companies do exactly the same as in the nineties and before the credit crisis. Experts recognize the criticism. Practice shows that companies buy shares at high prices and issue shares at low prices. That is why it is often better to pay more dividends. 

KPN 
Dutch Telecom concern KPN bought 1 billion treasury shares between 2004 and 2011 for an amount of 10 billion euros in total. In 2013 it went bad with the telecom concern and the company had to raise three billion euros to improve the financial position. The share price was then so low that KPN had to issue 2.8 billion new shares. On balance, KPN issued 1.8 billion new shares. The company did not, however, earn any money, but it received 7 billion euros.
And KPN was no exception. Aegon, steel company Arcelor Mittal and publisher Reed Elsevier also had to issue new shares during the credit crisis, while in the previous years they paid top prices to buy back their own shares.

My conclusions

There are good reasons for companies to buy their own shares in order to help shareholders. In my opinion there are also good reasons to give employees their share, as they contributed to the well-being of the company. Yes, shareholders take some risk, but it is the hard work of employees that generates the money.

Buying your own shares may carry the risk of future down turns and the need for new capital, but at lower share prices.

I personally know a company that shares their profits with its employees in the form of several months bonuses, depending on the profits.

Do you work at a company that does this or does your management only care for shareholders? In case of the latter, do you want to get back at them by becoming your own boss?

If your answer is yes, then read about the best program available to become an affiliate marketer on the internet. And yes, you can also work from home. Read here my personal review of this once in a lifetime opportunity.

16 Replies to “No Money for extra Salary, but Shareholders experience Wealth maximization”

  1. That is a wonderful article about ” no money for extra salary  and but shareholders experience wealth maximization”. Back in those days when my father was still working for his company before he was retired, he earned salary and most times, they were bonus especially when the company made alot of money for that year, and some time they are been rewarded for there had work. On the other hand, he still but shares from some other big companies including shell. So he was experiencing the life of a shareholder and also the life of an employee, which was pretty good for him.

    1. Now that was smart thinking of your father and maybe a little bit lucky. Anyway, we all might want to be where he was. Thanks for this example.

  2. Hi Jerry,

    Your review on the stock exchange and buying and selling shares is simply great. I was totally ignorant about this sector. In 2006, in our country, there was a great crash in the stock market. Many people are victims of losses. Since my fear began to grow towards this sector. I used to avoid this. After reading your article, I learned a lot and my fear becomes reduced. Thank you very much for your wonderful reviews.

    Regards,
    Rgpratap.

    1. I myself have never been a shareholder and probably never will be. I am glad though that my article was of help to you.

  3. Dear Jerry,

    Thanks a lot for the insightful and informative article. You have given me plenty to think about here and this article is so thorough it opened my eyes to all sorts of information I wasn’t aware of! Thanks a lot for the great insights!

    I always love to learn more about stock markets, stock exchanges etc.,

    Indeed, From my personal experience not many companies are really interested in their employees growth even to increase the income of the employee once in a year they think a lot. As you correctly mentioned they just look at the market wages and offer it to their employees and not much interested to share their profit by a wage increase.

    I worked for a company for nearly 6 years in night shift I never received any bonuses, not only me and to be honest there is no such thing called bonus in that company lol. That’s one of the main reason I wanted to build my own business online. Now by GODS grace I am a full-time blogger working from home.

    “If You Don’t Build Your Dream Someone Will Hire You To Help Build Theirs.” ― Tony Gaskins

    Much Success!

    Paul

    1. Congratulations on your blogging success. Yes, a lot of companies prefer to provide the benefits to their shareholders rather than sharing it with all shareholders especially employees. Hence my warning in this article.

  4. I love this, very creative article. It is very true the way shareholders or some shareholders look down on the employees efforts and forgetting the fact that it is the employees’ effort that contributed massively to the company’s growth. This is why I have been so passionate of living a life of financial freedom and be free from all the hassles of my boss(employer) and the office work that will certainly not liberate me. I am grateful I joined wealthy affiliates where success is guaranteed. 

    1. So very true, even today the situation around employees is not optimal. However, we should keep trying to change it. If not, as you said, you better become your own boss.

  5. I personally believe that with the work employees put in,they deserve to share in the profits realized by the company. I mean, without employees,there would be no company to sell its shares. So it is only rational to allocate extra money for salaries. This would even motivate the employees to keep giving it their best and also reduce employee turnover. I also think employees should pull funds together and purchase shares that would give them a good enough stake in the company,that way,they can benefit as shareholders and also as employees and experience the wealth maximization that shareholders enjoy.

    1. Thanks for your comments. Allocate funds for salaries, hmmm. Their argument could be that the salaries they are paying is already in line with what the market pays. That is why I pleaded for bonuses or extra pay-outs in any form.

  6. Great post and good info.

    This is exactly what I said to a friend of me, he is so sceptical about this, and always say that the stock will plummet and so on. 

    I have shares of some companies, and they pay me dividends on it, so it is a win win situation. 

    You explained this very well, so I will also show this to my friend, lets see if he is convinced with that. 

    Thanks a lot for sharing it with us! 

    1. You are in the good situation that you have shares and the company pays dividend. Later on you could sell your shares at a profit, when you are lucky or take the time.

  7. The  companies involved are numerous. And as a matter of fact its the duty of the employees to become their own boss and stop being used by this sherlock masters. I once worked as a consulting engineering for a new company . we built it together from the scratch when it values was led than a few thousands. Alas in the end after a few years this same company was valued at several million. We the employees were the backbone,  as it was a servicing firm, not needing much tools or equipment. Our brains was used and we were not duly compensated. I started my own firm in the end. My opinion ?be your own  boss.

    1. You have given us the perfect example of what I was trying to tell to my audience. I am sorry that you had to experience this unfortunate situation, but as I said, this happens over and over again. You wonder what can be done about this in individual countries. I know that in my country, the Netherlands, the law and the unions are strong, but it is still not happening across the board.

      Ultimately, we the employees have a choice. We can leave and even become our own boss.

  8. I work with a small company of about 30 workers. My company currently shares extra profit with its staff, as a result, a lot of people have been working here for a long time now. It’s a good practice, and it would encourage employees to always give their best. I’d advise every company to care for their employees, because the employees put in the back effort to make sure the company is profitable. 

    1. All clear Louis, this is why I am suggesting that companies take care of all stakeholders, of which one are the employees. The reason is simple: they form an indispensable part of the company.

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