One reason firms repurchase shares is to avoid dilution from executive stock compensation programs.

"Analysts often treat buybacks as a stand-alone issue, but there is compelling research that suggests one of the main reasons companies conduct stock buybacks is to offset their executive compensation packages. For example, Klassen and Sivakumar’s (2001) research looks at repurchase and option activity for nonfinancial firms from 1995 to 1999. Their findings indicate that firms repurchase shares particularly to avoid dilution from executive stock option compensation programs. Further, Griffin and Zhu’s (2009) research states that “we conclude that the popular use of buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between stock buybacks and CEOs’ use of stock options as compensation.” However, Weisbenner (2000) finds that for 1995 repurchase activity, overall firm options rather than executive options, are connected with repurchase activity. Whether or not offsetting pay is the sole reason companies conduct share repurchases, we can be sure that without buybacks, companies could not structure compensation so heavily with stock grants and options."

empirical