Playing the math

Let's play with some numbers. Company A earns $1,000,000 in year 1. There are 1,000 shares. So the earnings per share are $1,000. In year 2 the company buys 100 of its shares in the marketplace but still earns $1,000,000. Earnings per share climb to $1111.11. In many companies the pay of the CEO and others is based in part on earnings per share. So, in year 2 the CEO will have higher earnings although the company's results were the same. More and more companies are buying back shares. Thus because the divisor (number of shares) is lower, the CEO's pay will increase if earnings per share are part of the compensation plan.

Would you think that compensation figures into the decision to buy back a company's shares? Let's look at the compensation of IBM's CEO and see if we have any help in answering that question.

Note that $4.4 million of her pay was based on EPS. How typical is this?