An intriguing little study on stock-based compensation today in Ophir Gottlieb’s newsletter. He looked at large-cap and mid-cap technology companies, and ranked them on what percentage stock-based compensation makes up of operating expense. He took the top three, and the bottom three, from each of the large-caps and the mid-caps, and rated them on two-year stock return.
Guess what? You probably have figured it out already. The six with the largest stock-based compensation grew at 43% (and, if you remove the outlier, Twitter, which was down 54%, the rest grew at 62%!). If you look at what some consider to be the “good boys” who paid the least stock-based compensation, they grew at all of 8% over two years.
It sounds as if you should look for companies that pay stock-based compensation instead of avoiding them. And it makes sense, of course. Employees of companies that aren’t growing don’t want stock. They want cash!
Saul
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19 Likes
Nothing like owning a piece of the company to motivate you. I also read a couple of days ago the two top execs at Monster made some $320 million combined in 2015 - might explain why the stock went from $20 in 2010 to almost $160, 800% in 6 years.
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CMFSoloFool
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Ophir Gottlieb’s research does not show that option compensation is good for anyone beyond the optionees, only that the fast growing companies tend to use it more than slow growing ones. Saul points out a possible reason, the faster the stock price rises the more valuable the options become and therefore management votes options for themselves.
Back in 2002 I made a theoretical evaluation of stock based compensation and my conclusion was that all are better off, the company, the shareholders and the optionees.
June 11, 2002
Options Math
http://softwaretimes.com/files/options%20math.html
Denny Schlesinger
14 Likes
I agree. Correlation is not causation. The fact that the top 3 (a VERY small sample, by the way!) granters of SBC outperformed the bottom 3 is not a model for predicting the behavior of other companies.
Stock-based compensation is wonderful as long as the stock price goes up, up up. But when it crashes, suddenly employees that once felt very wealthy are faced with the grim reality that a large part of their expected salary just disappeared with the whim of Mr. Market. The poster child for this is LinkedIn. LinkedIn pays about 75% of its profits as SBC – it appears to be a company run as an employee-benefit fund! But when the market slashed the share price by 43% in one day, I imagine the feeling around corporate HQ was far from exuberant.
Options in the right proportion are effective motivating tools, and may indeed provide the incentive to align executive (and employee) incentives with shareholders.
But, Silicon Valley companies in particular pay out extraordinary amounts of stock-based compensation. The fact is that SV companies must use more and more options and other SBC to attract and retain top talent. But the industry is caught in an upward spiral, perhaps even a “SBC bubble” that must surely burst.
Tiptree, Fool One guide, long LNKD
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It would be interesting to compare these findings with true fundamentals improvement, rather than simply stock price.
You get what you incentivize. Not necessarily a better, more financially able company, but stock price improvement that may be underpinned by a fleeting foundation.
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It would be interesting to compare these findings with true fundamentals improvement, rather than simply stock price. You get what you incentivize. Not necessarily a better, more financially able company, but stock price improvement that may be underpinned by a fleeting foundation.
Let’s see, The top three in giving stock based compensation as a percent of operating expenses for the large-caps turned out to be Facebook, Salesforce and Google: Nope, no fundamental improvement there. You get what you incentivize, just stock price improvement on a fleeting foundation.
I think if you sought out the large caps giving the most SBC five years ago, you would have made a bundle.
Saul
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