Stock-Based Compensation- When Stock Value Falls

Miriam Gottfried reported in today’s Wall Street Journal that, “Stock-based compensation isn’t a real expense—or so tech companies would have investors believe. But as Twitter shows, that story falls apart when a company has to reset its compensation to reflect its fallen stock price.

“The micro-messaging service has been offering additional restricted stock units to employees of every rank with the goal of keeping them from defecting. That is diluting existing shareholders who have already endured a 64% drop in its share price over the past year.

“In doing so, the company becomes a telling example of the double whammy investors face when the value of Silicon Valley’s most common compensation currency, stock, takes a dive. When that happens, ‘there is a potentially dangerous feedback loop, in which more stock must be issued to make up for the downfall in employee expectations of the stock price versus the market,’ as Sanford C. Bernstein analysts recently noted.”

The Journal article explained that, “And Twitter serves as a reminder of the importance of factoring in stock-based compensation when valuing a company—even when management prefers to back it out.

“Before its latest move, Twitter’s stock-based compensation already was unusually high—247% of pro forma earnings in 2015, versus 46% for Facebook and 26% for Google parent Alphabet, according to Bernstein.”

Today’s article also quoted Warren Buffet: “Excluding stock-based compensation is ‘the most egregious example’ of ‘managers telling their owners to ignore certain expense items that are all too real,’ [Mr. Buffet] wrote.”

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