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Friday, April 23, 2021

Stock market rally is good for corporate bosses, too

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For chief executives this year, the word of the day is “cash” as they reap billions from selling shares of their firms and cashing in stocks-fueled incentive packages. The potential for massive rewards has created a sense of control, said investor Pierre Lagrange, co-founder of 663 Capital in New York City.

“It creates a feeling of choice: You can be wrong, but you can’t make the same mistake twice,” Mr. Lagrange said.

In the first nine months of the year, the Standard & Poor’s 500 index has returned 13.2 percent, the sharpest nine-month jump since 2014. According to data compiled by data website Strategas Research Partners, it is the largest such rise ever in the third quarter.

The markets are also rebounding from a year-end sell-off in 2017 when markets seized on worries about rising inflation and interest rates. Part of the higher returns this year can be attributed to rebounding corporate profits and costs of stock buybacks and merger and acquisition.

John Steele Gordon, a principal at Raine Group in New York, said investors find themselves “a bit more positive and optimistic” about the prospect for corporate growth.

“Maybe the market is doing better and we’re more positive,” Mr. Gordon said. “A lot of this is driven by the cost of capital going down,” as debt costs lower.

(Sometimes credited as a so-called “Warren Buffett effect,” low-interest rates have led to borrowing to buy up assets to boost earnings.)

The rise of the stock market has benefited many corporate chief executives: since the beginning of the year, the FTSE NAREIT All American REIT Index is up 21.5 percent.

Of the 383 chief executives that have registered for proxy statements this year, 76.7 percent have benefited from share repurchases, with a cumulative average gain of 29.8 percent, according to data compiled by BlackRock. When chief executives can sell their shares after he or she has purchased them, then they have to bear the full cost.

CEOs often received sizable stock awards in past years as a side benefit for taking over a firm, so he or she enjoys the benefits of rising stock prices but also does not have to take a hit if the shares fall and also does not have to pay taxes on the gains.

An even bigger trend is the decline in one of the most common executive perks: travel. In 2018, 51 percent of CEOs have requested travel costs for executive, board member and staff, down from 59 percent in 2016, according to a survey by BlackRock and 8R Consulting.

The share of money paid to executives through stock-based compensation was also down in the 2018 survey, dipping to 25.6 percent from 27.3 percent in 2016.

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