Why Stock Dividends are not just good for investors

Daniel Eran Dilger in his insightful post, Why is Microsoft Buying Back $40 Billion of its Own Stock? points out that executives and other option holders are enriched by stock buybacks without having to increase the value of the corporation.

Warren Buffett on Rewarding Failure.

In a 2005 letter to shareholders of Berkshire Hathaway, Warren Buffett wrote:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.