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25 Lewis & Clark L. Rev. 303 (2021-2022)
Stock Buyback Ability to Enhance CEO Compensation: Theory, Evidence, and Policy Implications

handle is hein.journals/lewclr25 and id is 319 raw text is: STOCK BUYBACK ABILITY TO ENHANCE CEO COMPENSATION: THEORY, EVIDENCE, AND POLICY IMPLICATIONS by Nitzan Shilon* I report that stock buyback ability to enhance CEO compensation has reached a record high amount corresponding to one-third of total pay. Also, I refute the common wisdom that this ability is attributed mainly to buyback impact on per share criteria that determine annual bonuses. Instead, I show that be- cause of recent reforms in executive compensation design, the ability of buy- backs to boost the amount of CEO stock-based compensation has become ten times higher than their potential to increase annual bonuses. I argue, first, that the potential of stock buybacks to enhance their compensa- tion provides CEOs with incentives to conduct buybacks excessively and op- portunistically. Second, I explain that this ability motivates CEOs to game their incentive compensation arrangements and turn them from pay for per- formance into pay for manipulation. Third, I argue that firms camouflage the ability ofstock buybacks to increase executive pay. Fourth, I explain that CEOs do not only have the incentives to abuse buybacks but they also have the power to act on these incentives, and that buyback activity is consistent with their incentives. Fifth, I argue that these distorted incentives are likely to leadfirms to underinvest in productive capabilities, disguise poor financial performance, and contribute to the creation ofa market bubble that increases the likelihood of another financial crisis. Borrowing from dividend protection, which safe- guards 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 buyback * Associate Professor, Peking University School of Transnational Law. I am grateful to Jesse Fried, Gitit Gur-Gershgoren, Ehud Kamar, Yair Listokin, Haggai Schreiber, Dan Weiss, the participants of the Finance and Accounting PhD seminar at Freie Universitat Berlin, and the participants at the Canadian Law and Economics Association conference for helpful comments. I would also like to thank Equilar Inc., an executive compensation research firm, for providing complimentary use of its reports. Itay Monhiet and Sebastian Preissner provided excellent research assistance. 303

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