Financial statements course · Lesson 8 of 10
Stock pay is a real cost, paid in shares.
Many companies pay their staff partly in shares. The cost is real, but no cash leaves, and many companies leave it out of the figures that they talk about most.
The cost
Example Co. paid $15 million in stock last year, 1.5% of revenue. The income statement counts it as a cost, as the accounting rules require. At Example Co., the cost is inside SG&A. The cash flow statement adds it back, because no cash left.
The owners still pay. The company gave away part of their business in place of cash wages.
Adjusted figures
| GAAP measure | $ millions | Adjustment | Adjusted, $ millions |
|---|---|---|---|
| Operating income | 180.0 | Add stock pay | 195.0 |
| EBITDA | 220.0 | Add stock pay | 235.0 |
An adjusted figure is a non-GAAP measure. The company decides which costs to leave out. Stock pay is the most common one. For Example Co., it adds $15 million, which lifts the operating margin from 18.0% to 19.5%.
The SEC has rules for these figures. When a company shows a non-GAAP measure, it must also show the most comparable GAAP measure and a reconciliation between the two. In SEC filings, the GAAP measure must be at least as prominent.
Find the reconciliation table in the earnings release. Read each adjustment and ask if the cost will come back next year. Stock pay comes back every year.
What the buyback bought
| Shares, millions | Count |
|---|---|
| Shares, start of year | 100.5 |
| New shares from stock pay | +0.5 |
| Shares bought back for $30 million | −1.0 |
| Shares, end of year | 100.0 |
Example Co. spent $30 million to buy back 1.0 million shares. Stock pay created 0.5 million new shares, so $15 million of the buyback only canceled them. The share count fell by 0.5 million, or 0.5%.
When a company says that it returned cash to its owners, check the share count. Part of the buyback can be the cash cost of stock pay.
Key points
- Stock pay is a real cost, even when no cash leaves.
- Start from the reconciliation table, not the adjusted figure.
- Compare the buyback with the new shares from stock pay.
Sources
- Deloitte, Overview and General Requirements of Regulation G and Item 10(e), for the rules on non-GAAP measures.