FWRECR17133BEIS - Share Buybacks and Executive Pay

The overall purpose of this project is to examine the relationship between the use of share buybacks and executive remuneration. More specifically we would like to understand whether buybacks are being used (by design or accident) to artificially meet EPS targets in CEO pay contracts and/or to inflate the value of their share awards rather than to create long-tem value for the company.

As explained above, this work will: • deliver the Government's manifesto commitment "to commission an examination of the use of share buybacks to ensure that they cannot be used artificially to hit performance targets and inflate executive pay" that has been reaffirmed by the BEIS response to the Corporate Governance Reform green paper, published on 29th August. It will help government come to a conclusion on whether there exists a significant problem, if so what it is, and what further steps might be necessary; and • contribute to current work on corporate governance reform, executive pay and investor stewardship, including potentially influencing revisions to the UK Corporate Governance Code and UK Stewardship Code.

The project should seek to answer the following questions: • To what extent have share buybacks (by design or accident) helped meet EPS and total shareholder return (TSR) targets? • Are share repurchases used by executives to meet performance targets such as EPS and TSR, and to boost share based remuneration levels by creating (short-term) increases in share price? Does the academic literature suggest that the use of buybacks to meet targets is relevant to the UK? • Do performance targets such as EPS and TSR incentivise the use of share buybacks for myopic reasons that are not value creating for the company? • How important are performance related measures, such as, EPS and TSR to CEOs overall pay plan and how has this evolved over time? • Does the United States regulatory framework on buybacks and the typical pay structure for US CEOs result in a stronger use of buybacks to manipulate executive pay in the US than in the UK, or does the evidence suggest that these problems exist in the UK to a similar degree?

The work should aim to answer these questions by examining the existing literature and by carrying out its own analysis based on up-to-date UK-specific data. It should also analyse the different regulatory frameworks in the US and the UK, and assess to what extent the existing US evidence applies to the UK (please refer to the section "Suggested Methodology" for more detail on the three suggested components of the project).

The successful bidder may also indicate what basic steps could be taken to avoid share buybacks being misused to inflate executive remuneration, should the analysis suggest that this was indeed the case. This additional step is though optional. The provider is not expected to make any recommendations.