Australia's top companies spent $1.5 billion last year buying shares for executives, exploiting loopholes in disclosure laws and overstating operating cash flow in the process.
The loopholes are documented in a report by proxy adviser Ownership Matters, called "While You Were Sleeping: invisible buybacks for employee share plans and how to fix them".
More than a third of the top-100 companies acquired on-market shares for use in their incentive schemes, mostly for executives. The total cash cost was $1.5 billion.
BHP Billiton and Macquarie Group were the most prolific - the former has spent $1.34 billion over the past four years ($424 million last year) and the latter spent $403 million last year.
But Macquarie also provided the best disclosure of any company, explaining the practice in detail in its presentations on capital management.
Most companies only disclosed the practice in their cash-flow financing, and the share buybacks had the effect of overstating operational cash flow, the report's author Martin Lawrence wrote.
"Simple changes to the listing rules would address the regulatory and disclosure gaps that have emerged," he said.
Qantas too has made substantial buybacks - $16 million last year and $65 million the year before - wading into the market to buy shares for its executives at a time when it had been conserving capital and suspending shareholder dividends.
In relative terms, UGL was the most prolific. In line with its reputation for aggressive remuneration, the engineering group spent $18 million buying shares for its executives out of an operational cash flow of just $111 million.
The report said the disclosure in the area was so poor that 22 of the top 100 bought shares for their incentive schemes but did not disclose the quantity.
"This included companies such as Computershare, which in 2012 spent $US22.8 million or nearly 7 per cent of operating cash flow, on acquiring its own shares for use in incentive schemes but did not disclose how many shares it acquired".
Purchases fell into two categories: where companies bought shares through on-market deals to satisfy equity incentives as they vested and where companies established trusts, managed by third parties, to acquire shares to ensure the trust always had sufficient shares available when vesting occurred.
"This situation has arisen because of a regulatory gap, whereby purchases of shares on-market by a company for incentive schemes are not treated as buybacks under the Corporations Act or the ASX listing rules," Ownership Matters said.
Last year, BusinessDay exposed the practice of top companies paying their executives dividends on unvested stock. In other words, the executives had not become entitled to the stock under their incentive arrangements but the boards were paying them the dividends on that stock nonetheless.
As a result of the revelations, this practice had largely been phased out this year, Mr Lawrence said.
This practice of buying incentive shares in on-market deals without proper disclosure was more acceptable than the paying of dividends from unvested stock, he said, but the two were linked. And the disclosure rules needed to be tweaked, he added.
"This is how dividends on unvested shares arise. If you buy and hold them in trust you have to do something with the dividends," Mr Lawrence said. "If you leave dividends inside a trust, they are subject to punitive taxes."