Share-Based Compensation
IntermediateShare-based compensation is payment to employees, directors or others in the form of shares, share options or other equity instruments, recorded as an expense in the company's accounts.
Many companies, especially technology and start-up businesses, pay part of their employees' compensation in equity. This helps attract and keep talent and aligns staff interests with shareholders, because employees benefit when the share price rises.
Common forms include stock options, which give the right to buy shares at a set price; restricted stock units, which deliver shares after a vesting period; and employee share purchase plans.
Accounting rules require the fair value of these awards to be recorded as an expense, usually spread over the vesting period. For example, if a company grants options valued at 400,000 that vest over four years, it records about 100,000 of expense each year.
Share-based compensation is a non-cash expense, because no cash leaves the company when the award is granted. For that reason, some companies exclude it from adjusted profit measures. However, it has a real cost to shareholders: when the awards vest or are exercised, new shares may be issued, diluting existing owners.
Investors often look at share-based compensation as a percentage of revenue and at how much dilution it is causing over time.
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