Stock Compensation (RSUs/Options)
Stock Compensation refers to equity-based pay granted to employees and executives in the form of restricted stock units (RSUs) or stock options, aligning their interests with shareholders by making a portion of their total remuneration dependent on the company's stock price.
Restricted Stock Units (RSUs) are a promise to deliver a set number of shares upon vesting, which typically occurs on a time-based schedule (cliff or graded vesting over three to four years) or upon achievement of defined performance metrics (performance RSUs or PSUs). Once vested, RSUs are treated as ordinary income for the recipient and the full share value is taxable at delivery.
Stock options grant the holder the right to purchase company shares at a fixed exercise price (the strike price, usually set at the market price on the grant date) within a defined window (typically 10 years). Options only have economic value if the stock price exceeds the strike price — they are said to be in-the-money when the market price exceeds the strike and underwater or out-of-the-money otherwise. Incentive stock options (ISOs) receive favorable tax treatment for employees, while non-qualified stock options (NSOs) are more flexible and more commonly used in practice.
From a financial reporting perspective, ASC 718 (Accounting Standards Codification 718) requires companies to measure stock-based compensation at fair value on the grant date and recognize the expense over the vesting period. For options, this value is typically estimated using a Black-Scholes model or a binomial lattice model. For RSUs, the fair value is generally the stock price on the grant date.
Investors monitor stock-based compensation because it is a real economic cost to shareholders — future dilution — even though it does not reduce cash flow. Non-GAAP earnings figures often add back SBC expense, which critics argue can obscure the true cost of labor at high-growth technology companies. The ratio of SBC expense to revenue or to gross profit is a widely tracked metric in tech equity analysis.
Clawback and forfeiture provisions typically attach to unvested grants, meaning employees who leave before the vesting date, or who are terminated for cause, lose their unvested awards — a powerful retention mechanism.