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.

Introduction

Stock repurchases (or “buybacks”) — where a company uses excess cash flow to repurchase shares of its stock to reduce common shares outstanding — have attracted significant attention from journalists, academic researchers, and government regulators; the concept of repurchases has also accrued significant supporters and detractors. According to Securities and Exchange Commission (SEC) Chair Gary Gensler, “In 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022”. [1] In 2023, the SEC revised rules issued in 1982 governing buybacks to require quarterly reporting of daily officer and director stock transactions that occur during a period of a stock repurchase program in addition to narrative disclosure of the details of the company’s buyback program and trading policies applicable during the program. The new regulations are intended to increase transparency of buyback processes and executive stock transactions during such programs. This Viewpoint summarizes Pay Governance research on buybacks within the S&P 500, the impact of buybacks on incentive compensation, and recent regulations governing buybacks.

In 2003, the SEC amended rules that provided companies with a safe harbor from liability for market manipulation for stock repurchases or buybacks as long as the buybacks were conducted in accordance with the rules. Prior to the initial rules issued in 1982 that allowed for buybacks, companies largely had to be dependent upon dividends to allocate excess cash. However, granting special dividends was a much less tax-efficient method, given the dividends were paid to all shareholders and may be taxed as ordinary income, while buybacks allowed shareholders the option to participate in a plan to repurchase shares.

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