What it is
Stock-based compensation (SBC) is a form of non-cash payment to employees and executives, commonly through stock options, restricted stock units (RSUs), or employee stock purchase plans. It aligns employee incentives with shareholder interests, as the value of their compensation increases with the company's stock price. While not a cash expense, SBC is recorded as an expense on the income statement, reducing reported net income, and impacts the fully diluted share count.
Investors monitor stock-based compensation because it can significantly dilute existing shareholders if new shares are issued, or impact earnings if recognized as an expense. High SBC, especially in growth companies, can depress reported earnings per share even if the company is otherwise performing well. Analysts often adjust earnings figures to account for SBC when evaluating profitability, using metrics like non-GAAP earnings or adjusted EBITDA to get a clearer picture of operational performance.
Why it matters
SBC can dilute your ownership and impact reported earnings, making a company appear less profitable than it is operationally. It's a key factor in valuation.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice