No Images? Click here ![]() Share buybacks are not being used make targets easier, says Government-sponsored researchTwo years after the publication of the Green Paper on corporate governance and the reiteration of the Government's manifesto commitment to look at whether share buy backs have been used to “inflate pay”, the Department for Business, Energy and Industrial Strategy (BEIS) has just published a 151-page report on the subject. (Share repurchases, executive pay and investment BEIS Research Paper Number 2019/011) The Government’s concern, at the outset, was “to ensure that they (share repurchases) cannot be used artificially to hit performance targets and inflate executive pay.” It also wanted to look more generally at whether share buy backs are an unproductive use of capital. The report cites US research which has argued this. The case has been made in the UK, for example by Andrew Smithers, who argued that executive incentives have increased volatility in corporate performance as well as creating a disincentive for capital investment. The Kay review in 2012 also highlighted the problem of “short-termism” in the UK equity markets. The short conclusion to a long and carefully-worded academic report is that no significant relationship was found – over the period from 2007 to 2017 – between share buy backs and either the existence of EPS performance measures or the amount of a long-term share-based plan linked to EPS. The research also indicated that no company had successfully used share buy backs to beat EPS targets. There is, however, some evidence, though not causal, to link EPS measures in pay incentives and lower investment. The report argues that this strengthens the case for replacing long-term incentive plans with deferred share awards – or what we at FIT tend to call time-vested restricted shares. FIT comment The report says that, while the analysis shows that systematic use of share buybacks to manipulate EPS is unlikely, this is not the same thing as saying that it does not happen at all. This leads to one of the most important points for Remuneration Committees of companies which use EPS as a performance measure for pay. As a matter of due diligence, the impact of share buybacks on EPS should be quantified and understood. The report says that 30% of 73 companies surveyed for the research said they adjusted their EPS targets. This may seem low but the most common reason given for not adjusting was immateriality. Even so we think that Committees should satisfy themselves that this is the case just as they consider the risks of unintended consequences and the behavioural impact of any performance measure linked to pay. Where Remuneration Committees prefer to link variable pay to performance here are 4 questions to ask: 1. What is the benefit of share buybacks for this company now? If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. Rory Cray Darrell Hare Matt Higgins John Lee Sahul Patel Iain Scott Katharine Turner This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper. This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 5 Fitzhardinge St, London W1H 6ED. |