Boards often miss this link, and the misunderstanding gets worse for two reasons. First, audit committees of the boards often allow companies to portray SBC as a “non-cash” and “free” payment in the reporting of “adjusted” performance metrics. Second, another committee of the same board, the compensation committee, relies on those adjusted metrics to grant even more SBC, reinforcing the cycle.
Based on our research on compensation plans and share buybacks of firms listed on U.S. stock exchanges, we offer five recommendations to help boards measure the true cost of equity pay, improve planning, and strengthen incentive-aligned value creation for shareholders.
First, let’s look at a typical SBC cycle that ends in buybacks:
* The company grants equity (options, RSUs, performance shares) as compensation to employees. If the company were not granting SBC, it would pay more cash compensation. * Over time, equity vests. If stock prices rise, employees exercise their rights to get shares at a discounted price. The company issues new shares, increasing shares outstanding and diluting shareholders’ percentage ownership. * Management then buys back shares to reduce shares outstanding and offset that dilution.
In short, SBC may not require immediate cash payments to employees, but over time, it leads to even larger cash spending to neutralize dilution. The higher the share price increases over time, the higher the cash outlay to offset dilution. SBC is neither truly cashless nor free.
Generally accepted accounting principles (GAAP), the standard practices for U.S. companies, require firms to estimate SBC cost at the grant date and recognize it as a compensation expense over the vesting period. For example, a $5 million grant vesting over five years produces $1 million of expense each year. These are not small amounts. For three modern technology companies, Palantir, Snap, and Snowflake, these expenses in 2024 amounted to as much as 24%, 19%, and 43% of revenues, respectively.
SBC doesn’t require immediate payment of cash to the employees. We calculated that 88% of the most valuable U.S. companies, particularly those in modern technology industries, label these expenses as “non-cash” and add them back to calculate “adjusted earnings,” “adjusted EBITDA,” or non-GAAP profits. Companies claim that adjusted earnings help investors better assess “operational performance.” For example, for fiscal 2025, Snowflake backed out $1.479 billion of such expense, to convert an operating loss of $1.456 billion to an adjusted profit of $231.7 million.
It’s the audit committee’s job to ask what adjustments are made in producing a non-GAAP number and whether it changes the economic story. When adjustments lead to distorted decisions, the responsibility is not only management’s, it is also the board’s.
These non-GAAP measures often receive equal, or greater, prominence than GAAP numbers. They shape not only investors’ decisions but also internal decisions such as executive pay.
That “free and cashless” story eventually unfolds when firms pay cash to offset dilution. Our analysis found that in 2024, SBC exceeded share purchases for 51% of 3,358 firms that bought back shares. To put this in perspective, the figure below shows that for Alphabet, Microsoft, and Meta, buyback costs exceeded SBC in the same year (all amounts in million dollars).
Adobe mentions in their FY 2025 10-K filing: “In order to minimize the impact of ongoing dilution from issuance of shares, we instituted a stock repurchase program.” NVIDIA’s states: “Our share repurchase program aims to offset dilution from shares issued to employees…” Meta CFO Susan Li described stock-based compensation as the “largest driver of expense growth in 2026,” adding that Meta will continue to “repurchase shares as part of the sort of buyback program” to offset equity compensation. Similarly, Salesforce described in its 2025 filing that it had “returned in aggregate more than $21 billion to stockholders—more than fully offsetting dilution from fiscal 2025 stock-based compensation.”
To make matters worse, compensation committees use adjusted performance measures to determine CEO bonuses and grant new SBC. Higher performance then justifies larger SBC awards. Research shows that CEOs of S&P 500 firms that perform higher adjustments in non-GAAP earnings receive substantial unexplained pay. Over time, that extra compensation adds to dilution pressure and the cycle continues.
Governance solutions should start with better measurement and improved incentive design. Below are five concrete actions boards can take:
Require a schedule comparing stock-based expenses to the costs of anti-dilution buybacks. This exercise forces an answer to an important question: If we had paid cash instead, would we be spending less cash overall? If not, then are we being misled by adjusted earnings?
Most companies budget capital expenditures for their cash planning; far fewer explicitly budget cash burn rate for anti-dilution measures. The committee should approve an annual budget for anti-dilution cash burn. It’s a dynamic number that varies with outstanding stock-based compensation plans, changes in share price over time, and vesting schedule. This budget—that is, the likely cash outflow—should be plainly disclosed to investors in the company.
Recognize that buybacks are a part of compensation financing and should be governed as such, deliberately and transparently, not as an afterthought.
If the company reports an adjusted profit metric that adds back SBC, then adjust it again for anti-dilution cash spend. A practical approach is to adopt a metric such as “operating income after equity-pay cash cost,” defined as GAAP income plus SBC expenses minus anti-dilution repurchases. Stop the illusion that SBC has no cost. As shown in the examples of Intel, Microsoft, and Meta, such adjustments could lower, not increase, non-GAAP profits.
Equity can improve retention and align incentives, but it’s not automatically cheaper than cash salary, especially when share prices rise. Ask management for an annual “cash vs. equity” comparison: What would performance measures and total compensation look like under a more-cash/less-equity design? The goal is not to eliminate equity pay, but to consciously choose a mix that fits strategy and cash constraints rather than defaulting to equity pay because it looks free in adjusted earnings.
Using “adjusted performance” to determine bonus and new equity grants creates a snowball effect of excessive compensation. To reduce this distortion:
* Use net-of-buyback investor-relevant metrics for performance-based awards. * Use relative (peer-indexed) measures where appropriate so broad market moves don’t drive pay.
In summary, the board of directors must ensure that both performance measurement and pay decisions reflect economic reality and that it is transparently conveyed to shareholders. Treating buybacks, SBC, and non-GAAP performance as separate topics, and not as one system, can lead to overstated performance, misguided pay, poor cash planning, and weaker governance. Treating equity compensation as a real cost is the first step toward more honest metrics, better governance, and aligned compensation incentives for long-term value creation.