Annual meeting April 25 In 2016, IBM CEO Ginny Rometty received a 65% increase in total disclosed compensation: $32.7 million. A significant portion of the increase was due to a large stock option grant. Companies with large option grants sometimes contend that the figure in summary compensation tables overestimates the value of options. They rightly note that options only have value when stock price increase is complicated stuff: Myron Scholes, after all, won the Nobel prize for Economics in 1997 in part for his role in creating the Black-Scholes method. In this case, however, experts believe the value as presented may be an understatement.

As analyzed by ISS and further by Melin Anders of Bloomberg, IBM’s calculation of stock options – the same it has used for many years but highlighted this year by a grant of 1.5 million options valued at $12.1 million -- is problematic. “Based on [ISS] calculations, the award [as estimated by the company] is almost 60 percent below the proxy adviser’s own ‘fair value’ estimate of about $29 million. That’s the biggest gap for S&P 500 companies that granted options to executives last year.” Melin also points out that the option award was granted at near the company’s five year low trading price.  Although there were price increase criteria attached, the stock price has since recovered enough that those have already been met.

Even without this analysis of option value, there’s a growing consensus that Rometty is overpaid. Michael Hiltzik wrote a great column this year calling her package, “proof that IBM continues to set the standard for overpaying its CEO for mediocre performance.”

Indeed, IBM appeared on our list of companies with overpaid CEOs last year as well.  In 2015 Rometty received a $4.5 million bonus, up $900,000 from 2014. This high pay came amidst falling profits and revenue.

This year her bonus increased again, by $400,000. In a document IBM filed at the SEC this month the company noted that, “The long-term incentive plan paid out at 32% for the 2014-2016 period due to lower operating EPS and free cash flow performance in the three year period.” However, it is critical to note the way EPS is influenced by stock buybacks.

A stock buyback is just what it sounds like: a company buying back some of its stock in the open market. There are times it may be appropriate, if the shares are undervalued and there’s really nothing better the company can do with the cash. But it also reduces the number of shares out there, making EPS look better by lowering the number of shares in the denominator of the fraction. Robert Ayres has as pithy an explanation of buybacks as I have seen: “When compensation is tied to share price, [executives] are rationally driven to take advantage of any legal mechanism to drive share prices up during their tenure.”

Ayres uses IBM as an example in “The Economic Consequences of Shareholder Value Maximisation” on the flaws of linking compensation primarily on stock performance rather than company performance.

He writes:

“Since the 1990s, blind dedication to Shareholder value maximization (which continues) has led to unending emphasis on cost-cutting (by job cutting), lack of product innovation and the use of cash to finance corporate stock buy-backs. Between 2005 and 2014, IBM delivered US$32 billion in dividends to shareholders and spent US$125 billion buying its own shares (to prop up the share price), while investing only US$111 billion in capital investment and R&D combined.”

Much more has been written and will be written about larger failures of IBM. Where did the circle start? It could have been when pay for performance was adopted in a narrow way that rewarded stock performance above all else. It could have been when buybacks became an accepted way to prop up stock price. It could have been when shareholder value primacy was widely adopted.

The question is who is going to stop the spiral. Shareholders play an important role with their votes.  A strong, appropriately engaged board should also provide a check.  Some of these larger strategic issues predate Rommety’s promotion to CEO in 2012, though she has been at the company since 1981. There has been a fair amount of turnover in the board, which may be another governance red flag, but there remain five directors who have served more than 10 years. The longest serving director, American Express CEO Kenneth Chenault – himself an overpaid CEO – has been on the board since 1998.  Glass Lewis & ISS have both recommended against the compensation plan, so many shareholders will vote against. We may see significant opposition to directors as well.