Finance: What is stock based compensation?

What is stock based compensation? Stock based compensation is exactly what it sounds like: a way to compensate employees using stock. It’s used in the form of purchasing options that employees may exercise, usually after a few years.

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Transcript

00:19

theory anyway So over time management has been paid in

00:23

equity ownership grants as well as in cash that is

00:27

company management gets paid in stock options and in stock

00:31

or rather shares of the company simply granted to them

00:34

in lieu of cash Why do companies not just pay

00:38

cash while they want management toe Have that whole ownership

00:42

thing going for them to act like owners You know

00:45

not just like union employees They want management with direct

00:48

stakes in how well or pa poorly the business per

00:51

forms in the long run and think about the dynamics

00:55

of a ceo getting paid even a relatively huge million

00:58

dollars a year in salary and nothing else that's it

01:02

well that ceo takes a company from four hundred million

01:06

dollars in sales and thirty million in profits to five

01:09

years later two billion dollars in sales and for three

01:13

Hundred million in profits that is the ceo made the

01:16

company at least ten times more valuable certainly ten times

01:20

more profitable and in five years that's really good But

01:23

that ceo just got their single million dollars a year

01:26

each year along the way Well that ceo would not

01:29

have financially participated personally in making shareholders so much wealthier

01:35

and that's not fair right If management of the company

01:38

makes huge returns for investors doesn't it seem right that

01:41

management should have huge returns for themselves and not just

01:45

a basic salary and male Maybe a little bit of

01:47

a bonus there too well some companies loan money at

01:51

low interest rates to ceos and other top execs so

01:54

that their ableto buy shares in the company leveraged well

01:58

Other companies just grant shares to management and still others

02:02

just grant stock options is kind of a spiff above

02:05

their cash compensation So yeah it's all about having skin

02:08

in the game which if you play football without sufficient 00:02:11.45 --> [endTime] padding is a definite possibility