Capitol Report: The Sanders, Schumer buyback test would prevent almost all companies from stock repurchases

Banking


If you’re to take the vision Senators Chuck Schumer and Bernie Sanders have outlined for stock buybacks, there would be very few companies able to repurchase any stock at all.

The Senate minority leader and Vermont independent provided few details in a recent op-ed written in The New York Times, but MarketWatch started digging into which companies would be impacted.

The op-ed says companies should not be able to plan stock buybacks until they prove they are investing in “workers and communities first.” Schumer and Sanders write that means:

• Paying all workers at least $15 an hour;

• Providing seven days paid sick leave;

• Offering “decent pensions and more reliable health benefits.”

So, what’s a “decent” pension? What are “reliable” health benefits? Does “workers” mean all company employees or extend to contractors?

Who will judge these companies worthy?

Calls to Schumer’s and Sanders’ offices resulted in no additional feedback.

MarketWatch compared a list of companies with the largest buybacks in 2018, provided by S&P Indices, to the criteria Sanders and Schumer proposed.

Only a few companies, like JPMorgan Chase

JPM, -0.16%

  and Bank of America

BAC, +0.16%

 , stand out for likely being able to meet all the potential criteria today.

Minimum wage

The senators prioritized $15 minimum wage as the first criteria in the op-ed. That knocks out all but a handful of companies form the list of qualified firms, since although movements to hike the minimum wage such as “Fight for 15” have made progress towards a nationwide adoption of the goal implementation of the policy is not yet widespread.

Though companies do not have to disclose their minimum wage, many discussed their situation after the passage of the Tax Cuts and Jobs Act. Several large corporations announced wage increases after the tax reform bill was signed in December 2017, in response to the call for sharing the windfall that resulted from lowering the corporate maximum tax rate from 35% to 21%. But not everyone is going as high as $15 per hour right away and in some cases, the change is only for some workers.

Amazon

AMZN, +0.11%

  raised its minimum wage for all workers, including “full-time, part-time, temporary (including those hired by agencies), and seasonal employees” in the United States” to $15 as of Nov. 1, 2018, according to a press release. The wage hike also applies to workers at the company’s Whole Foods grocery chain. Charter Communications

CHTR, -2.34%

 , Fifth Third Bancorp

FITB, +0.42%

 , Wells Fargo & Co

WFC, -0.26%

 , U.S. Bank

USB, -0.06%

 , and Comerica

CMA, +0.44%

  also hiked pay in 2018 to a minimum of $15 per hour.

Target

TGT, -1.52%

  will make the change more gradually. It raised its minimum wage to $11 an hour about a year ago, and plans to bring its lowest wage for all workers to $15 by the end of 2020.

Some companies such as JP Morgan Chase

JPM, -0.16%

  and Aetna

CVS, +0.12%

  upped pay to beyond $15 per hour before the latest push from the tax reform legislation.

However some companies only boosted pay to $15 per hour in certain business units such as Unilever’s

UN, -0.84%

  Ben & Jerry’s and Walt Disney Co.

DIS, -1.59%

 for its theme park workers.

The senators’ proposed bill could also utilize pay ratio data now required by the Dodd-Frank law. Companies are disclosing the ratio of CEO pay to worker pay for the first time. As of May 10, 2018, the median pay ratio was 70:1 for all Russell 3000 companies and 166:1 for all Equilar 500 companies, according to the Equilar CEO Pay Ratio Tracker.

The data does vary widely, however, due to widely varying business models and CEO pay policies. Alphabet Inc.

GOOGL, -0.07%

 disclosed the lowest pay ratio of 0.000005:1, since its CEO was paid $1 while its median employee was paid $197,274.

On the other hand, McDonald’s Corp

MCD, -0.07%

 disclosed the highest pay ratio for Equilar 500 companies at 3,101:1, with CEO compensation of $21.8 million and median employee salary of $7,017. McDonald’s defined the median employee as a part-time restaurant crew employee located in Poland, according to an essay in the Harvard Law School’s Forum on Corporate Governance and Financial Regulation.

Paid sick leave

Sanders and Schumer also specifically require a policy providing seven days of paid sick leave as a priority for workers. Rich Fuerstenberg, a senior partner in the Life, Absence and Disability practice at Mercer, a Marsh & McLennnan benefits consultant business, told MarketWatch that it may be fairly easy for most large companies to meet this criteria if required.

Mercer’s 2018 Absence and Disability Management Survey of the Fortune 500 reported that 62% of the companies that participated reported offering paid sick days to their salaried employees, separate from vacation days. In addition, 54% did the same for their hourly employees. For both salaried and hourly employees, the median number of paid sick days allowed was 7 days.

“For this group of employers,” Fuerstenberg told MarketWatch, “of those that offer paid sick days, most would meet the 7 day requirement in the proposal but some would need to increase.

Fuerstenberg also noted 11 states — Arizona, California, Connecticut, Maryland, Massachusetts, Michigan, New Jersey, Oregon, Rhode Island, Vermont, Washington State and Washington D.C. — and a number of municipalities have enacted paid sick leave mandates. Those mandates typically require employers to provide 5-7 days of paid sick leave.

Read: From higher pay to retirement plans, how states are changing workers’ lives in 2019

‘Decent’ pensions and health benefits

It’s much more difficult to develop objective criteria for “decent pensions and more reliable health benefits” that can be used easily as a screen by regulators tasked with deciding if a company can plan a share buyback.

One test for “decent pensions” that could be implemented is whether a company has a fully-funded defined benefit pension plan. Defined benefit plans provide a fixed, pre-established pension benefit for employees at retirement based on length of service and salary history.

Analysis of data from SEC filings by Pranav Ghai, CEO of research firm Calcbench, more than half of the companies in the S&P 500 in 2017 had defined benefit plans that were underfunded, and 213 also reported a share buyback. A defined benefit plan is underfunded if the obligations to pay pensions exceed the value of assets in its the investment portfolio intended to fund required pension payments.

The average buyback by a company with an underfunded pension plan was $1.27 billion. In 2017 57 companies overfunded their defined benefit pension plans and 42 of the companies with overfunded plans also reported a buyback.

Most workers, however, are now offered only defined contribution plans such as 401(k) plans. Only 16% of companies surveyed by benefits consultant Willis Towers Watson in its report, “Retirement Offerings in the Fortune 500: A Retrospective,” offered a defined benefit plan to new hires in 2017, down from 59% in 1998.

Sanders’ and Schumer’s bill could include criteria that makes companies ineligible to plan a buyback if they have an inferior 401(k) plan, since this is the only retirement savings most workers will have besides Social Security.

An inferior 401(k) plan might be one that does not provide immediate eligibility, where the employer does not match or provides a very small match for employee contributions and one that has a long vesting schedule that frustrates the portability need of today’s worker. A 401(k) plan with poor investment choices and high fees will also decrease the employees ability to save for retirement.

The majority of 401(k) plans, 67%, offer immediate eligibility, according to a recent Vanguard analysis, but that still leaves quite a few that don’t allow workers to start saving for retirement right away. Nearly 11% of 401(k) plans require workers to be with the company for an entire year before they are able to put their money in the plan, according to Vanguard.

About 45% of 401(k) plans require employees to contribute 6% of their pay to the 401(k) plan to gain the maximum employer match, between 50 cents and $1 for each dollar the employee contributes, rather than providing a 50% match on all contributions up to 6%.

What would make a “reliable health benefit,” another vague criteria of the Schumer/Sanders proposal?

Beth Umland, the director of health and benefits research at Mercer, broke down some of the results from its National Survey of Employer-Sponsored Health Plans for MarketWatch. Mercer conducts the survey annually and in 2018 it covered more than 2,400 employers with 10 or more employees participated.

Umland told MarketWatch that one criteria the senators could include to judge an employer-sponsored health plan is the total cost to employees. Employers pay 77% of total health care premium costs, on average, in the group Mercer surveyed. The average individual deductible in a PPO plan (the most common type of medical plan) is $982. Coverage is offered to part-time employees by 45% of these companies, with 21 hours per week, on average, required for eligibility.

Smaller employers — 10-499 employees — typically offer substantially less rich benefits, said Umland. For example, in smaller companies the individual deductible is sometimes more than $2,000.

Umland noted, “Under the Affordable Care Act, U.S. companies are no longer allowed to have terrible employee health plans. The ACA or Obamacare set minimum standards that plans have to meet to satisfy the employer mandate. Most employers already offered plans that went beyond the bare minimum in order to attract and retain employees, but the ACA established the floor for all of them.”

Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.

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