Morgen Stanley IM: Stock-Based Compensation

Ongoing shareholders typically realize more dilution with young companies than with old ones because SBC tends to be more significant, and buybacks less significant, for young companies. Research is equivocal on the benefits commonly cited for SBC.

Unpacking the Issues

• U.S. companies are increasingly paying employees with stock-based compensation (SBC) rather than cash, with SBC rising to $270 billion in calendar year 2022, according to our analysis.
• We begin by giving data showing overall trends, then turn to the accounting issues, and wrap up by evaluating the strengths and weaknesses of SBC and whether this shift is achieving its objectives.
• Ongoing shareholders typically realize more dilution with young companies than with old ones because SBC tends to be more significant for young companies, whereas stock buybacks are generally more modest for small companies.
• Research is equivocal on the benefits commonly cited for SBC, which include it being an incentive for employees to deliver results, a tool for retaining workers, and a means to foster an overall sense of ownership.

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