Definition
A form of non-cash compensation where companies grant employees equity instruments (e.g., stock options, restricted stock units - RSUs) instead of, or in addition to, cash salary. It’s used to incentivize employees, align their interests with shareholders, and conserve cash.
Financial Statement Impact:
- Income Statement:
- SBC is recognized as an operating expense (usually in SG&A) over the required service (vesting) period.
- This is a non-cash expense that reduces Operating Income (EBIT) and Net Income.
- Cash Flow Statement:
- The SBC expense is added back to Net Income in the Cash from Operations (CFO) section because it is non-cash.
- Balance Sheet:
- Retained Earnings decreases (due to lower Net Income).
- However, Shareholders’ Equity increases by the same amount (typically in Additional Paid-In Capital (APIC)).
- The net impact on Total Shareholders’ Equity from the expense recognition is zero.
Cash Impact Consideration
- While recognizing the SBC expense is non-cash, related activities like the company potentially repurchasing shares to offset dilution upon exercise/vesting, or tax implications, can have actual cash effects later.
See also: Non-Cash Expenses, Income Statement, Cash Flow Statement, Balance Sheet, Shareholders’ Equity, Retained Earnings, Additional Paid-In Capital (APIC)