Mind the GAAP: Stock-Based Comp Has a Cost

by Frank Roche on June 4, 2011

in Business, Communication, Pay

This one’s for the comp quants out there: Stock-based compensation has a cost.

That’s not much of a headline, is it? Tell that to Salesforce.com, which said, “The company’s non-GAAP results exclude the effects of approximately $42 million in stock-based compensation expense” in their most recent SEC filing.

“They are reporting GAAP EPS but headlining “non-GAAP” EPS that excludes “stock based compensation,”” says Todd Sullivan of Seeking Alpha. “Stock based comp in FY 2010-11-12 has progressed from $90M to $117M to $238M (164% growth). Meanwhile GAAP EPS has cratered from $.63 to $.47 to the expected loss in FY 2012 of ($.03) to ($.01). But because of the shift from dollar comp to stock comp, CRM is able to show “non-GAAP” or as we’ll call it “pretend earnings” growth of $1.22 in 2011 to estimates of $1.35-$1.38.”

Profit is profit. Generally Accepted Accounting Practices (GAAP) are generally accepted because they work. They’re standards. I don’t get to adjust my profit at my house by excluding two tuitions at NYU (yikes!), our cost of groceries, or what we spend on auto insurance. Doesn’t work that way at home and it doesn’t work that way in business.

Here’s why I care: Employees pay attention. They know this straight up. Their profit is what’s left in their pockets once they’ve paid all their bills. Regular people mind the GAAP. They get it. It’s disrespectful of them to tell them anything different.

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