Every year, corporate boards approve billions of dollars in stock buyback programs and announce them to the world as good news for shareholders. Markets cheer. Analysts celebrate the “return of capital.” EPS ticks upward. And somewhere in a conference room, a compensation committee files away the year’s equity grants under the label “non-cash expense” and moves on.
This is the chain of misunderstanding that a March 2026 article in Harvard Business Review, authored by accounting professors Joseph Comprix of Syracuse University, Kevin Koharki of Purdue University, and Anup Srivastava of the University of Calgary, seeks to untangle. Their argument is pointed and important: boards of directors, including the audit and compensation committees whose job it is to understand these things, frequently misread what buybacks actually cost. And that misreading has real consequences for how companies are run, how executives are paid, and whether shareholders actually end up better off.
The Cycle That Boards Keep Missing
The logic starts simply. Companies — particularly technology and digital businesses — rely heavily on stock-based compensation to attract and retain talent. Rather than paying in full cash, they issue equity: options, restricted stock units, performance shares. This is the moment that compensation committees typically label the expense “non-cash,” record it on the income statement with minimal fuss, and approve it as a cost-effective way to align employee and shareholder interests.
But the equity doesn’t disappear. Those shares, once issued, dilute existing shareholders. For every new share that enters the float, existing shareholders own a slightly smaller percentage of the company. Left unchecked, this dilution compounds over time, eroding the value of every share already in the market.
So companies buy back their own stock. The repurchases reduce the share count, offsetting the dilution from the equity grants and keeping metrics like earnings per share from deteriorating. Boards approve these buyback programs, typically framing them as “capital return to shareholders” — a term that carries the connotation of returning cash to the people who own the business.
Here is the problem: when a buyback is simply absorbing shares that were issued as compensation, it is not returning capital to shareholders in any meaningful sense. It is paying the compensation bill. The cash leaving the company’s balance sheet is going to offset employee pay, not to enrich shareholders. As the HBR authors put it, a growing share of buybacks represent not a payout choice, but an antidote to dilution of shares issued for stock-based compensation. The framing as “capital return” obscures what is actually a labour cost.
The Numbers Behind the Problem
This isn’t a marginal issue confined to a handful of small companies. Among America’s largest technology firms, where equity compensation is a foundational part of the pay structure, the scale is significant.
A survey of financial executives found that 68% cited offsetting dilution from stock-based compensation as either “important” or “very important” in their decision to buy back stock. Analysis published by Epsilon Theory found that at Meta, stock buybacks over a decade covered only 77% of newly issued shares — meaning some dilution was still permanent. At Alphabet (Google’s parent), the figure was 63%. The conclusion: those companies transferred more than $300 billion from shareholders to employees over a decade through this mechanism, while the buybacks themselves were framed to the market as shareholder-friendly moves.
The academic label for the practice is “sterilisation” — buying back shares to keep the dilutive effect of equity grants from showing up in share count metrics. Some companies spend 60 to 77% of their free cash flow on this sterilisation process. That is cash that could be going to actual shareholder returns, productive investment, or debt reduction. Instead, it is compensating employees while being reported as something else.
Why the “Non-Cash” Label Is Doing Serious Damage
The HBR authors identify the labelling of stock-based compensation as “non-cash” as a pivotal distortion. From a purely technical standpoint, the label is defensible — no cash changes hands at the moment of the equity grant. But from a shareholder economics standpoint, it is deeply misleading.
Here is why: when a company issues equity to employees, it is diluting shareholders. When it later buys back that equity using cash, real corporate cash — generated by the business, owned by shareholders — flows out the door. The fact that the equity grant itself involved no cash payment does not change the economic reality that shareholders ultimately fund it. The “non-cash” label creates a mental accounting error that leads compensation committees to undervalue what they are spending on talent, which in turn encourages even greater use of equity pay, which requires even larger buybacks to counteract, which gets labelled as shareholder-friendly capital allocation — and the cycle repeats.
The consequences compound. When boards report performance metrics — return on equity, earnings per share, operating income — they frequently present adjusted figures that exclude stock-based compensation as a cost. This produces a picture of profitability that is more flattering than the underlying economics justify. Investors, analysts, and the board itself may be managing against numbers that systematically overstate the company’s true earnings power.
What Boards Should Actually Be Doing
The professors’ prescription is clear: boards need to accurately measure the real cost of equity compensation, including the cash that will eventually be spent on buybacks to offset dilution. The two cannot be evaluated in isolation.
This means treating the full cycle as a single economic transaction. When a compensation committee approves an equity grant, it should be thinking not only about the grant-date fair value of the awards, but about the likely buyback cost that will follow. When an audit committee reviews a buyback program, it should be asking what percentage represents genuine capital return versus what percentage is simply covering the compensation tab.
Investment research firm TDM Growth Partners has advocated precisely this view, arguing that buybacks should be assessed independently from stock-based compensation and grounded in valuation and return-on-capital considerations, not as a mechanical offset to dilution. In other words: if a company is buying back shares primarily because it issued too many to employees, that should be recognised for what it is — a compensation expense paid in arrears — not celebrated as a shareholder benefit.
Some companies genuinely do use buybacks to shrink their share count, compound earnings per share organically, and return true value to owners. These are very different from companies that issue heavily through equity compensation and then spend equivalent amounts repurchasing to hold the share count steady. Both may look identical from the outside if you only read the buyback headline. The distinction is what governance should be designed to surface.
A Governance Blind Spot With Real Stakes
The HBR paper lands at a moment when stock-based compensation at American companies is at historically elevated levels, particularly in technology. S&P 500 companies alone have been buying back shares at or near record annual rates. The 1% excise tax introduced on buybacks has done little to slow the volume. And as the AI infrastructure boom drives hiring competition to new extremes, equity grants are unlikely to shrink anytime soon.
The implications for investors are significant. A company reporting strong earnings growth might be masking dilution and funding it through buybacks classified as capital return. The EPS improvement that investors are rewarding with a higher multiple might be driven not by business performance but by share count reduction — paid for by cash that belongs to shareholders, directed to cover employee compensation.
This isn’t an argument against stock-based compensation or against buybacks per se. Both have legitimate purposes and real advantages when used correctly. What the authors are arguing — compellingly — is that the institutional framework that governs these decisions, from the compensation committee to the audit committee to the boardroom, is systematically miscategorising and therefore mismanaging a significant cost.
The label matters. When “payroll” gets recorded as “capital return,” everyone — shareholders, analysts, and the board itself — ends up making worse decisions. Fixing that starts with calling the thing what it actually is.
Written by Shalin Soni, CMA specializing in financial analysis, global markets, and corporate strategy, with hands-on experience in financial planning and analytical decision-making.
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Source: Based on Harvard Business Review and publicly available information.