Definition
Stock-Based Compensation Expense refers to the cost incurred by a company when they award their employees with equity incentives, like stock options or shares. This expense is reported on the company’s income statement and it reflects the estimated cost of those equity awards at the time they are granted. The actual amount could vary depending on changes in stock price and other variables.
Key Takeaways
- Stock Based Compensation Expense refers to the cost companies incur when they offer shares of stock or stock options to employees as part of their remuneration package. This expense is recorded on the company’s Income Statement.
- It serves as a way for companies to align the interests of their employees and shareholders. Employees receiving stock or stock options are incentivized to work towards increasing the value of the company’s stock.
- The expense is typically calculated using a fair-value-based method. There may be certain vesting requirements and conditions that employees must meet before they fully own the stock or can exercise the options, which are taken into consideration when calculating the expense.
Importance
Stock Based Compensation Expense is an important finance term as it relates to the portion of the compensation provided by a company to its employees or executives in the form of equity-based payments, such as stocks or options.
Essentially, it’s a way for companies to reward their employees without immediately spending cash.
This expense is crucial in financial analysis because it impacts a company’s net income and earnings per share on its financial statements.
Furthermore, understanding this expense allows investors and analysts to evaluate the company’s compensation strategy, cash liquidity, and how efficiently it is using its resources, which can provide important insight into the company’s overall financial health and performance.
Explanation
Stock-based compensation expense is a way companies use to reward their employees, consultants and directors. This form of compensation takes place when a company gives its employees the option to buy shares of the company at a pre-determined price.
This acts as a form of incentive to the employees to strive towards improving the company’s performance, as they stand to benefit from the company’s rising stock value. This form of remuneration is recorded as an expense in the company’s financial statement, which impacts its net income.
The main purpose of stock-based compensation expense is to align the interests of employees and shareholders. By offering shares, companies aim to motivate employees to contribute to the company’s growth and profitability, as they will benefit from the increase in the stock’s value.
On the other hand, it also helps companies to conserve cash as they are not required to pay out as much in the form of cash salaries or bonuses. This method can also be utilized to attract high-quality employees or retain valued employees, making it a flexible tool in competitive job markets.
Examples of Stock Based Compensation Expense
Microsoft: In the technology industry, companies often use stock-based compensation to attract and retain talented employees. In 2020, Microsoft reported a significant amount of stock-based compensation expense, which is related to the granting of stock options and restricted stocks to its employees. When these options are exercised or the vesting period of restricted stocks ends, Microsoft have to recognize this as an expense in their financial statements.
Amazon: Amazon is another example of a company that provides stock-based compensation. Amazon uses this not only as a way to motivate their employees but also aligns their interests with those of the company. For instance, in 2019, the company reported an expense of over $6 billion from stock-based compensation.
Facebook: Facebook, one of the biggest tech giants globally, also heavily relies on stock-based compensation for its employees. In its 2020 income statement, Facebook reported over $5 billion of stock-based compensation expense. Such remuneration is a key component of Facebook’s total operating expenses, illustrating how common the practice of offering equity or options as compensation is in the tech industry.
FAQs on Stock Based Compensation Expense
1. What is Stock Based Compensation Expense?
Stock Based Compensation Expense refers to expense companies incur in exchange for stock equity given to employees. This category generally includes employee stock options (ESO), restricted stock, and other forms of equity compensation.
2. How is Stock Based Compensation Expense calculated?
The Stock Based Compensation Expense is calculated using the fair value method. The fair value of the stock, the number of shares granted and the vesting period are all taken into account to calculate the total expense.
3. How does Stock Based Compensation Expense affect earnings?
Stock Based Compensation Expense reduces a company’s earnings. It is a non-cash expense, similar to depreciation and amortization, hence it reduces the company’s net income but doesn’t have any impact on its cash flows.
4. Where can I find information on Stock Based Compensation Expense in financial reports?
Information on Stock Based Compensation Expense can be obtained from a company’s income statement or in the footnotes of its financial statements.
5. Can Stock Based Compensation Expense be tax deductible?
Yes, Stock Based Compensation Expense is generally tax deductible. The amount and timing of the deduction will depend on the type of stock award and when it becomes taxable to the employee.
Related Entrepreneurship Terms
- Equity Awards
- Employee Stock Options
- Restricted Stock Units
- Stock Appreciation Rights
- Expensing Stock Options
Sources for More Information
- Investopedia: A trusted source for financial and investment terms definitions and explanations.
- AccountingTools: An online educational resource that provides a wealth of information about all aspects of accounting, including stock-based compensation expenses.
- Corporate Finance Institute: A professional training and certification organization that offers a wide range of information on finance matters, including stock-based compensation.
- PwC: A multinational professional services network with a strong focus on auditing and assurance services. They have various articles and publications on stock-based compensation.
