The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.

Elon Musk
Elon Musk has received tens of billions of dollars in stock-based compensation from Tesla
(Image credit: © Britta Pedersen-Pool/Getty Images)

Many tech companies issue stock to employees to give them a stake in the performance of the company. This has been highly effective in a tech bull market and a key incentive to employees. But employee share schemes, or stock-based compensation (SBC), present three problems for analysts and investors.

First, firms add back SBC to calculate adjusted earnings. These are therefore overstated. Payroll costs would be higher without employee share schemes.

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Stephen Clapham

Stephen is an experienced investment analyst who provides investing courses online and in person through his website behindthebalancesheet.com