Last year we published our benchmarking of stock-based compensation (SBC) in high growth technology companies.
That report found:
- There was an inverse correlation between SBC-based dilution and medium-term share price performance;
- Reserve Stock Units (RSUs) were rising in popularity over options; and
- SBC based dilution is not clearly reported on or guided to, yet has a critical role in long-term share price performance.
This year, we revisit this SBC-based dilution using a similar cohort of 104 technology growth companies with enterprise values from $353m to $2t*. Rather than just review 2023, we felt showing the average across both 2022 and 2023 provided a more reliable representation of the level of dilution across companies in recent years.
Companies are waking up to the impacts of SBC-based dilution
From the 104 companies, we saw the 2-Year Average SBC-Dilution Ratio range from 0.2% to 8.6%.
The statistical breakdown of average net SBC-dilution (across 2022 and 2023) was:
- Top quartile – Less than 1.65% annual dilution
- Median – 2.85% annual dilution
- Bottom quartile – More than 4.14% annual dilution
In 2023, the SBC-dilution ratio was marginally less (30 bps) across the board than in 2022 (median 2.6% in 2023 vs 2.9% in 2022).
While one obvious driver of reduced dilution is the mild recovery of share prices in 2023 from the lows of 2022 (meaning that less stock needs to be issues for the same value), our perspective is that management teams and investors are becoming more aware of the detrimental impacts high rates of SBC can have on shareholder returns.
At the very top of the list (companies who issued minimal stock awards relative to their share count) are the large caps: Netflix, Tesla, Fortinet, and Shopify, as well as small-cap LMS provider, Docebo. Over the last two years, relative to the rest of the tech universe these companies have diluted shareholders less than 1.65% through their designed SBC program.
Stock-based compensation is a balancing act
The primary merit of SBC is to recruit and retain great talent by aligning incentives between employees and share price performance. We believe companies should adopt an SBC framework that balances these merits with the dilutive impacts on shareholders.
Last year, zero companies with over 3% average SBC-based net dilution had share prices that beat the Nasdaq. While there is no one-size-fits-all strategy for SBC, the data is very clear on the threshold that companies should be targeting over the long term.
In general, we think an efficient outcome should seek to minimise SBC-based dilution to a company to less than 3% pa, and incorporate options rather than just RSUs (which has become the norm over the last decade). 
Buybacks should be considered separately from SBC-based dilution
One of the most common questions we received from our previous analysis was whether it was appropriate to also factor in share repurchases, or buybacks.
In 2023, we saw an increasing number of technology companies initiating buyback programs.
As a capital allocation decision, the primary driver of any buyback program is to do so when shares are undervalued relative to intrinsic value. We have written on this extensively and too often see tech companies buying back shares to help offset the impact of SBC-based dilution (and in some cases, only because of this, regardless of share price/valuation considerations).
As such, we think that a company’s decision to perform buybacks should be made independent to offsetting SBC-based dilution. In other words, they shouldn’t anything to do with each other. This was the main reason why we excluded any repurchases as part of our original analysis.
Combining buybacks and SBC creates an interesting but conflated view
Out of interest and a bit of curiosity, we decided to see what factoring in buybacks does to the analysis.
We scraped additional data on the number of shares that companies have repurchased in 2022 and 2023. Across our coverage, 45 companies had a repurchase program in 2023 (less than half of our sample universe). When we factor in the number of stock retired due to buybacks, and overlay it on our original chart – we found an interesting view.
As you would expect, the data shows that buybacks lower the net dilution rates. But it also highlights that companies can still dilute at high rates while initiating buyback programs.
Factoring in buybacks, the statistical breakdown is now: 
- Top quartile – Less than 0.77% annual dilution 
- Median – 2.24% annual dilution 
- Bottom quartile – More than 3.20% dilution 
As seen above, there are some companies such as AppLovin and Alphabet that repurchased more shares than they issued via SBC (negative dilution).
At the other end of the spectrum, there are examples where investors could be wrongly thinking that a buyback program is helping reduce share count – when in fact, the company is issuing so much SBC that it’s still net dilutive in that year.  
Quick case study: In 2023, Docusign had;
– SBC-based dilution of 8.2%
– A buyback program that reduced shares (as of start of the year) by 1.5%
– All in all, net of buybacks, Docusign still diluted shareholders 6.7% for the year!
Internally, we often use this analysis to compare various companies during diligence. More importantly, the data gives us the ability to frame reasonable questions to management teams about their remuneration philosophy. We hope you too have found the data useful.
Appendix
* Data Source:
Sourced from 104 companies’ 10k reports, scraping the number of options, RSUs and similar awards granted and forfeited each year.
* Calculation:
SBC-Dilution Ratio is calculated by dividing the net sum of awards issued (granted minus forfeited) by the starting amount of shares outstanding to get to a net dilution.
For the purpose of summation, we use a basic rule of thumb of 3 options = 1 RSU
