The Advisors' Blog

John blogged earlier this week on TheCorporateCounsel.net about whether buybacks are truly evil – or just misunderstood. One of the recurring criticisms of share repurchases is that they unfairly benefit executives in two ways: (1) by inflating stock prices on which awards are based, and (2) by providing executives with shares that they can resell at those inflated prices. John notes a recent study from three finance profs, which found little evidence for this. Here’s more detail:

It is well known that CEO pay increases in firm size and revenues and that bonuses are tied to accounting performance (Healy, 1985; Core et al., 1999; Murphy, 2013). Therefore, it is not surprising that the above-median repurchase firms’ CEOs earn more pay than the smaller, no-repurchase firms. Whether this difference represents excess pay for the above-median repurchase firms can be evaluated using the pay model described above. As reported in Table 4, the estimated excess pay for the CEOs of the above-median repurchase firms is $71,000. This amount is economically small, only about 0.9% of the average CEO’s total pay, and statistically insignificant.

Compared to the no-repurchase firms’ CEOs, the above-median firms’ CEOs earn $51,000 more excess pay on average (= $71,000 – $20,000). However, this difference is not statistically significant and is also economically small in relation to the average CEO’s pay. Overall, the small difference between the above-median firms and no-repurchase firms, the even smaller difference between all firms and no-repurchase firms, as well as the lack of a monotonic relation across the groups, collectively suggest that repurchases are not associated with excessive CEO pay.

– Liz Dunshee