Buybacks and Executive Compensation

Part of the reason for the stock market’s rise has been the growth in the amount of shares being bought back by companies. It’s grown from $131 billion in 2003 to $345 billion in 2006. Of course, by buying back its stock a company reduces the number of shares outstanding, which translates into higher earnings per share.

How does higher earnings per share help CEOs? Well 28% of the S&P 500 use earnings per share as a measure of the company’s performance, and, thus, the CEO’s compensation. Do the CEOs in these 28% have a strong desire for a buyback? You can bet on it. A few do so even when the company has negative cash flow.