Stock-Based Compensation (SBC)
Employee compensation paid in the form of equity awards such as stock options and restricted stock units, recorded as an expense under GAAP.
What is Stock-Based Compensation?
Stock-based compensation (SBC) is a form of employee remuneration in which a company grants equity awards — most commonly stock options, restricted stock units (RSUs), or performance shares — in lieu of or in addition to cash compensation. Under GAAP (ASC 718), companies must recognize SBC as an expense on the income statement, measured at the grant-date fair value of the award and amortized over the vesting period. SBC is a non-cash expense that reduces reported net income but does not consume cash; it is added back in the cash flow from operations section of the cash flow statement. Investors and analysts scrutinize SBC because high levels dilute existing shareholders when new shares are issued to employees.
Example
A technology company grants 1 million RSUs to its engineers vesting equally over four years, with a grant-date stock price of $100 per share. The total fair value of the grant is $100 million. Under ASC 718, the company recognizes $25 million in SBC expense per year for four years. This non-cash charge reduces GAAP net income and EPS, which is why tech companies frequently report non-GAAP earnings that add back SBC. At vesting, shares are issued to employees, increasing diluted share count and reducing earnings per share.