Tags: share | buybacks | EPS | executive

Share Buybacks Enrich Corporate Executives

By Dan Weil   |   Wednesday, 08 May 2013 07:59 AM

When companies buy back shares, stockholders are supposed to be the beneficiaries of higher earnings per share (EPS), but it may be company executives who are making out best.

That's because many executives have their compensation tied to EPS targets. Share buybacks raise EPS by lowering the number of shares outstanding.

Some investors and compensation advisers are concerned about the link between EPS and executive compensation because they worry that the EPS figure can easily be manipulated, according to The Wall Street Journal.

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Firms in the Standard & Poor's 500 spent approximately $408 billion last year for stock buybacks, according to David Bianco, chief U.S. equity strategist at Deutsche Bank. But while their EPS grew 6.1 percent, their net income grew only 5 percent from 2011, The Journal reports.

One executive who made out well from a buyback is Safeway CEO Steven Burd, the paper reports. He garnered $2.3 million of stock in March, partly because the company enjoyed a 61 percent surge in EPS last year.

But it wasn't rising sales that sparked that gain, as they were little changed. Rather the EPS increase stemmed from $1.2 billion of stock buybacks, mostly paid for with borrowed money.

"If you're a CFO or a top executive, you can determine if the EPS goes up or not based on a stock buyback," Robin Ferracone, CEO of pay consultant Farient Advisors, tells The Journal.

Nearly one-fourth of the 1,500 companies in the S&P stock indexes use EPS as a measure for executive compensation, according to Farient Advisors.

Reuters columnist Felix Salmon takes issue with The Journal story.

"The implication here is that public companies should be concentrating on growth, rather than on more financial metrics like earnings per share or return on equity," he writes.

"I think that’s exactly wrong. Not all companies should be growing; some of them, in order to maximize their return on capital, should instead be shrinking. The world’s biggest banks are a good example."

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