Share Buybacks, Company Growth and Stock Options: Managerial Short-Termism at its Worst?

New Pay Governance Study Addresses this Question

NEW YORK--()--New analysis from executive compensation consulting firm Pay Governance ( finds that share buybacks may be a rational long-term capital allocation strategy and not an example of managerial myopia/short-termism.

The past year has seen extensive criticism of share buybacks as the prime example of “corporate short-termism.” The critics of share buybacks claim that corporate managers, motivated by flawed executive incentive plans - stock options, bonus plans based on EPS, etc. - undertake value-destroying buybacks to increase their own pay level. These critics argue that the cash used for share buybacks directly cannibalizes long-term capital investment, thereby damaging long-term stock price performance.

Pay Governance conducted original research that directly rebuts many of these claims. “We found that companies that conduct large share buybacks have equal TSR relative to companies that conduct smaller buybacks,” said Ira Kay, Managing Partner at Pay Governance. “Contrary to the managerial myopia criticism of share buybacks, the stock market apparently rewards companies equally for investing in company growth or transferring cash to shareholders via buybacks.”

                Median     Median
Median Median 2010-2014 2010-2014
Change in 2010-2014 CapEx Revenue
CSO TSR Growth Growth
Group         2010-2014     (Annualized)     (CAGR)     (CAGR)
Small (or Zero) Buyback Companies         4.9%     17.4%     12.6%     9.4%
Large Buyback Companies         -12.8%     17.7%     7.4%     5.2%
Total Sample         -4.4%     17.6%     9.2%     7.0%

Much of the criticism of share buyback strategies claims that the free cash flows transferred to shareholders through the use of share buybacks could otherwise be used to invest in long-term organic corporate revenue growth through capital investment, more research and development and by hiring more employees.

“Companies conducting larger share buybacks had lower revenue growth than the group of companies buying back fewer or no shares,” said Blaine Martin, the lead researcher on the study. “One hypothesis is that the companies buying back more shares faced weaker revenue growth and, thus, chose to transfer cash to shareholders by buying back shares rather than invest in projects with lower net present values.”

Another line of criticism of share buybacks is the claim that executive compensation programs create a perverse incentive for executives to conduct short-term, value-destroying share buybacks.

“Companies that grant stock options did indeed buy back more shares than companies that did not grant stock options,“ Kay said. “Importantly, however, those companies had higher TSR than the companies not granting stock options. This suggests that stock options can be an important means to motivate executives to create shareholder value, often through the use of share buybacks. As companies consider their incentive plan designs, our research suggests that capital strategy is yet another perspective from which to assess the shareholder alignment of executive incentive programs.”

            Median Change in     Annualized
Sample Common Shares Median TSR
Size Outstanding (2010-2014)
Incentive Design Characteristics         (# Cos)     (2010-2014)     (Annualized)
Companies Granting Stock Options to CEOs         301     -5.4%     18.2%

Companies Not Granting Stock Options to CEOs

        187     0.0%     16.1%

For more details on this Pay Governance study or to schedule an interview, please call Don Rountree at 770.645.4545.

Pay Governance LLC is an independent consulting firm focused on delivering advisory services to compensation committees. The consultancy also advises the management of companies in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Chicago, St. Louis, Dallas, Cleveland, Charlotte, Atlanta, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit


Pay Governance LLC
Don Rountree, 770-645-4545


Pay Governance LLC
Don Rountree, 770-645-4545