When a company has extra cash, it can invest it, pay it out as dividends, or buy back its own shares. Buybacks shrink the number of shares, which tends to raise the stock price, and with it the value of executives’ stock-based pay. Large U.S. companies now spend hundreds of billions of dollars a year this way.
Buybacks were legally risky until 1982, when the Securities and Exchange Commission adopted Rule 10b-18, which gave companies a “safe harbor” if they followed certain limits. Since 2023, companies have paid a 1% federal excise tax on buybacks, created by the Inflation Reduction Act.
Where people land
The case for it: Buybacks can reward short-term stock moves over long-term investment and wages, and they can let executives time the market with company money.
The case against it: Buybacks are simply a way to return cash to owners, like dividends; the money doesn’t vanish, it’s reinvested elsewhere. Research on whether they actually crowd out investment is mixed.
Proposals range from raising that tax, to banning executives from selling shares right after a buyback, to banning open-market buybacks altogether.
What you can do
If you have a 401(k), a pension, or other investments, you are a shareholder, and funds publish how they vote on executive pay. Shareholder proposals on pay and buybacks come up every proxy season. On the tax side, buyback rules are set in Congress, which makes them a fair question for your members.