Stock-based compensation is a type of employee benefit in which a company provides its employees with shares of its stock or the option to purchase shares at a discounted price. The purpose of this benefit is to align the interests of employees with those of the company's shareholders by giving employees a financial stake in the company's performance. This can be an attractive benefit for employees, as it allows them to potentially share in the company's success and profits. For shareholders, stock-based compensation can dilute the value of their ownership stakes in the company, as issuing additional shares can decrease the value of existing shares.

This graph portrays how a company is using its profits to reward its employees through equity-based compensation, rather than distributing those profits to shareholders through dividends or reinvesting them into the business:

• If a company has high levels of stock-based compensation relative to its net profits, it may indicate that the company is using a significant portion of its profits to reward its employees rather than returning value to shareholders or investing in the business. This could potentially raise concerns for investors about the company's ability to generate future profits or return value to shareholders.
• On the other hand, if a company has low levels of stock-based compensation relative to its net profits, it may indicate that the company is taking a more conservative approach to equity-based compensation and is prioritizing other uses for its profits, such as dividends or reinvestment in the business. This could potentially be seen as a positive by investors, as it may suggest that the company is focused on maximizing value for shareholders.
• Overall, comparing a company's stock-based compensation to its net profits can help investors understand how the company is allocating its resources and whether or not it is generating sufficient profits to support its equity-based compensation plans.