Stock Based Compensation

Stock Based Compensation

Many companies pay their employees in terms of stock rather than actual cash. These can be distributed terms of actual stock or stock options where there is a preset method of exercising it. Financial statements have a section on stock based compensation. In a section like the “accounting Policies and Notes to Consolidated Financial Statements” they will have a section on stock based compensation which compares the “net income as reported” as well as the “pro forma net income”. This difference is the stock base compensation. As a ratio Heiserman created the following formula:

He notes that one should avoid companies with a ratio of more than 15%.