Executive Pay Sensitivity to Stock Buybacks: Evidence, Implications, and Proposed Remedy

Peking University School of Transnational Law Research Paper

25 Lewis & Clark L. Rev. ___ (forthcoming 2021)

48 Pages Posted: 6 Mar 2020 Last revised: 24 Jun 2020

See all articles by Nitzan Shilon

Nitzan Shilon

Peking University School of Transnational Law; Israel Securities Authority

Date Written: February 20, 2020


This Article is the first academic study to systematically analyze the overall sensitivity of executive compensation to stock buybacks. Specifically, my analysis of executive compensation arrangements of CEOs included in the S&P 500 Index reveals that buybacks can enhance a record high portion of incentive compensation, corresponding, on average, to one-third of total CEO pay. I further show that, despite the focus of financial economists on the ability of buybacks to mechanically improve per share performance measures that determine executives’ annual bonuses, repurchases can, in addition and to a much greater extent, boost performance measures that decide executives’ long-term incentive awards.

I argue, first, that because a buyback can increase pay even when it would destroy firm value, executives are motivated to conduct buybacks excessively. Second, I explain that this potential motivates executives to game their incentive compensation arrangements and turn them from pay for performance into pay for manipulation. Third, I find that the impacts of buybacks on executive pay are camouflaged in firms’ public filings. These distorted incentives and the lack of transparency are likely to lead firms to underinvest in productive capabilities, disguise poor financial performance, and contribute to the creation of a market bubble that increases the likelihood of another financial crisis. Borrowing from dividend protection, which safeguards executive stock and option awards from the automatic decline in the stock price that dividends trigger, I suggest applying buyback protection, which would shield executive pay from the mechanical performance improvement that stock buybacks stimulate. Because I do not expect a mandatory rule requiring firms to adopt buyback protection to be effective I propose a novel regulatory reform to make the impact of stock buybacks on executive pay transparent. Transparency can be expected to push boards, shareholders, and proxy advisors to pressure firms to adopt buyback protection.

Keywords: corporate payout, payout policy, financing policy, corporate governance, corporate law, executive compensation, executive pay, equity-based compensation, agency costs

JEL Classification: G35, G32, G34, G38, K22

Suggested Citation

Shilon, Nitzan, Executive Pay Sensitivity to Stock Buybacks: Evidence, Implications, and Proposed Remedy (February 20, 2020). Peking University School of Transnational Law Research Paper, 25 Lewis & Clark L. Rev. ___ (forthcoming 2021), Available at SSRN: https://ssrn.com/abstract=3541993 or http://dx.doi.org/10.2139/ssrn.3541993

Nitzan Shilon (Contact Author)

Peking University School of Transnational Law ( email )

University Town,
Xili, Nanshan District
Shenzhen, Guangdong 518055

Israel Securities Authority ( email )

22 Kanfei Nesharim Street
Jerusalem 95464

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