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Government investigates whether share buybacks are used to inflate CEO pay

The government could crack down on share buybacks, as it has..

The government could crack down on share buybacks, as it has hired researchers to determine whether they are being used by companies to artificially inflate their executives' pay.

Share buybacks, where a company purchases some of its own shares to reduce the number available in the market and often raise their price, can increase a company's earnings per share. Since many executive pay packages are often decided in relation to this figure, executives who have completed a share buyback could unlock a higher pay bracket even though the company's performance has been poor.

Read more: HSBC boss Stuart Gulliver is facing pressure from shareholder groups over "excessive" pay

The Department for Business, Energy and Industrial Strategy (Beis) has appointed PwC and Alex Edmans, a professor at the London Business School, to research how common this practice is.

"There are concerns that some companies may be trying to artificially inflate executive pay by buying back their own shares," said business secretary Greg Clark.

"This review will examine how share buyback schemes are used and whether any action is required to prevent them from being abused."

The government was quick to acknowledge that there are legitimate reasons for share buybacks. A company may want to purchase shares if it believes they are undervalued, to make use of cash when business conditions do not justify spending it in other areas, or to meet investor demands to return cash.

Read more: Plus500 share price rockets on share buyback announcement

But there are concerns that "a minority" of companies are using the technique for less honourable reasons, to inflate pay and "crowd out investment".

Sports Direct came under fire from its investors last year, who feared that a share buyback would hand too much control to chief executive Mike Ashley.

The government is hoping that the research, set to be published later this year, will help strengthen public and investor trust and confidence in big businesses and corporate standards.

Last summer, Theresa May announced a broader package of corporate governance reforms including the creation of a public register of companies whose shareholders are protesting executive pay, new legislation requiring companies to annually explain the pay ratio between chief executives and employees, and a group to write corporate governance principles for large private companies.

Read more: A shareholder row is already brewing over the Investment Association's role in Theresa May's executive pay reforms

Original Article