Share Buybacks Driven By Executive Compensation

No other topic splits opinions in the financial community like share buybacks.

The pro buyback camp believes that using buybacks to return excess cash, is a prudent way of improving shareholder returns while those against buybacks claim that they are a waste of money and only benefit managers by boosting executive compensation.

Each argument has its valid points; some buybacks are clearly a waste of shareholder funds, but the well-executed buyback can create a lot of wealth for shareholders.

Pay Governance’s study shows a clear correlation between the size of buybacks and the granting of stock options as well as the use of EPS as an annual incentive metric. This might not be a bad thing for shareholders as stock option granting also appears to be correlated with higher shareholder returns:

Ira Kay believes that these figures show that options can be an effective way to motivate executives to create shareholder value, “Companies which grant stock options to their CEOs bought back more shares than companies that did not grant stock options. Importantly, those companies had higher TSR than the companies not granting stock options.” Ira continued, “This suggests that stock options can be an important means to motive executives to create shareholder value, often through the use of share buybacks.”

via Share Buybacks Driven By Executive Compensation.

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