Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here), and Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).
Introduction
Corporate share buybacks (also known as repurchases) have been somewhat controversial for many years, but have taken on even greater significance following the corporate tax cuts passed in 2017 and implemented in 2018. It is estimated that buybacks reached $1 trillion in 2018, likely fueled by extra cash resulting from the tax cuts. Buybacks are also gaining attention across a broader cross-section of the political arena, as three U.S. Senators and an SEC Commissioner have recently criticized share buybacks, with each commentary citing different criticism and potential solutions. [1] [2] [3] However, the common charge is that U.S. public companies are returning money to shareholders instead of investing in productive projects, equipment, workers, and long-term growth. Many buyback critics state the use of earnings per share (EPS) as an incentive metric and stock options inappropriately rewards executives for short-term decisions that reduce long-term value. Specifically, buybacks are criticized for mechanically increasing short-term EPS and “popping” the stock price to generate executive payouts at the expense of long-term performance.
