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Finance: What is stock based compensation? 7 Views
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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
- 00:00
Finance a la shmoop What is stock based compensation While
- 00:07
investors want management with skin in the game when your
- 00:11
ceo has ninety eight percent of her net worth tied
- 00:14
up in the stock of the company that she's running
- 00:17
well presumably she runs it better or at least in
Full 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
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