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Comment by user5994461 | Hacker News Reader

>>> base pay reductions of 30% for executive leadership

Aren't executives mostly paid in stock and bonus?

Paying people in stock and performance bonuses is ideal during a downturn. It doesn't cost the company anything to pay people in stock, since it just siphons off value from all existing stock, and nobody's getting their performance bonus!

> anything to pay people in stock, since it just siphons off value from all existing stock

wait what?

It doesn't cost cash, I think they meant.

Yeah, sorry it was unclear but I was more confused by the "siphoning" value part.

"Dilutes" stock value (per share) would possibly be more accurate? Keep throwing shares at execs; if the company is successfully, it's a dilution. If it fails, then at least they didn't waste real money.

Let’s say I have 1000 outstanding shares all worth $10. I need to pay someone a $5000 bonus. I’ll just issue 500 shares of stock to them instead because, well, that’s about $5000.

Hypothetically the per share price goes down by 1/3 here and is now worth $6.67 (but the company’s still worth $10,000 total it’s just 1500 * $6.67 instead of $1000 * $10).

Generally though bonuses like this come out of a pool that’s already been allocated years ago and there’s no change to stock price

Even if the pool is allocated years ago, it's still effectively dilution (as before shareholders effectively owned a fraction of the unallocated sharepool).

Creating new shares dilutes the existing share value. Paying employees in shares means you're diluting the stock value every time.

Of course, for most publicly traded companies there are so many outstanding shares that this is negligible.

I thought most executive compensation was paid out of pre-allocated shares.

Most employees are not executives.

If you scroll up, the question was "Aren't executives mostly paid in stock and bonus?"

There really is a cost to paying people in stock. That's why SBC is on the income statement. Additionally, analysts will often not add SBC back to cash flows.

With GAAP reporting, stock comp goes on the income statement and affects the bottom line. So it has a visible effect for investors, but no one cares about P/E anymore so...

Can someone explain to me how stock comp costs the company money, if it does? AFAICT it just creates equity dilution, but I might be missing something.

There are two ways to compensate with stock: purchasing stock on the open market with cash, or, hand out stock from a pool of withheld shares. The pool of shares might be periodically increased through creating new shares (and diluting) but this must be reported to the SEC and is only done infrequently.

GAAP reporting requires that stock compensation is written off as an expense. It does not reduce the company’s cash, but it does reduce the company’s earnings. Hence it changes the price to earnings figure.

> It does not reduce the company’s cash, but it does reduce the company’s earnings.

If it doesn't cost the company any money, why is it defined to affect the company's earnings?

Its from Accounting assets = liabilities + equity. So equity = a-l. If you pay cash your assets go down so your equity goes down. If you give away equity your equity goes down. In either case you equity goes down.

And the value of those is probably going down by more than 30%, seeing as how they're shares, and often linked to stock performance as well.

The amount of stock may be based on a much higher valuation at this point.

Aren't bonuses usually tied to base pay?

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