The Advisors' Blog

As Dave noted in our recent webcast “Managing the New Buyback Disclosure Rules” on TheCorporateCounsel.net, one of the common criticisms of share repurchases is that they allow executives to manage per-share earnings metrics to achieve objectives under compensation programs. This recent article by Pay Governance analyzes repurchase and incentive compensation data and provides the following key takeaways:

– While most S&P 500 companies conducting buybacks in 2018–2021 did not adjust performance goals or incentive awards to account for the lower share count post-buyback, those conducting the largest buybacks tend to adjust goals or incentive awards to offset for the impact.
– Although the use of per share metrics is common in incentive plans, most of these companies balance per share metrics with other performance categories, reducing the impact buybacks have on incentive payouts.
– Shareholder returns for companies in our sample conducting buybacks are similar to returns for non-buyback companies, thus dispelling the notion that companies conduct buybacks to inflate stock prices to the benefit of management.
– The majority of activist share repurchase demands are successful.

These findings seem reassuring for anyone concerned about the incentives of — or benefits to — corporate insiders when implementing buyback programs but highlight that the board needs to consider the buyback’s expected impact on the company’s executive compensation, decide whether to adjust goals or awards and appropriately document its deliberations. We cover this and many more considerations for buyback programs in our “Stock Repurchases” Practice Area on TheCorporateCounsel.net.

– Meredith Ervine