You are the chief financial officer for Esoteric, Inc., a company whose stock is publicly traded. The stock market has recently experienced an overall downturn, and the price of your company’s stock has decreased by about 15%. This significantly affects the compensation of the executives of your company, as their bonuses are based on the company’s stock price. The bonus plan rewards company executives who take actions to increase the value of the company to shareholders. The reasoning is that if management increases the value of the company to shareholders, management should be rewarded.
As you consider ways to increase the value of the company when the market itself is slumping, the following idea pops into your head: We will buy back our own stock. That will cause the remaining outstanding stock to increase in value, which is good for those individuals holding that stock. And it will also result in you and the other corporate executives receiving sizable bonuses.
Do you think this plan of action to increase stock price was what the designers of the compensation plan had in mind when they linked executive bonuses to company stock price? Does buying back the company’s own stock add value to the company as a whole? Should the compensation plan prohibit activities like buying stock back? Consider these issues and be prepared to discuss them.