Compensation Committees and Stock Buybacks

Compensation Committees and Stock Buybacks

By Jeff McCutcheon and Rich McGinley

Given the rapid growth in share repurchase arrangements, we believe it is necessary for compensation committees to closely review the relationship between buybacks and incentives and carefully consider the role of unintended consequences within the executive performance management process.  In a cursory review of executive incentives at companies undertaking substantial buybacks, Board Advisory found evidence of incentives that may have unintentionally influenced the company decision to repurchase shares, and where management incentives were paid unrelated to actual performance, resulting solely from a decision to shrink the asset base through a share repurchase. As buybacks continue to increase in size and frequency, we believe careful Compensation Committee review and clear statements to shareholders will become increasingly important to ensure incentives act as intended.

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Jeff McCutcheon

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