Stock-option rich and cash poor: It’s a common personal financial scenario in Silicon Valley, where employees are often compensated with share handouts rather than salary increases. The potential upside is often retirement-clinching, but the wealth is often a mirage. A similar kind of stock-based compensation fantasy, as it turns out, can surround the companies themselves—and according to Dealbook, some analysts are suggesting that LinkedIn was operating one of the biggest mirages in the Valley.
LinkedIn was notoriously aggressive when it came doling out stock to employees, a strategy designed to retain top-performers. But as the company started to struggle, the practice got out of hand: For the last two years, stock-based compensation represented an incredible 96% of operating income (for Amazon and Facebook, the total was closer to 15%). What’s more, LinkedIn removed stock-based compensation from its costs when reporting earnings–allowing for rosier headlines than were merited by the performance of its underlying business.
In announcing on Monday that it had acquired LinkedIn for $26.2 billion in cash, Microsoft noted that it would bring the company in line with its own accounting standards, which categorize stock-based compensation as an expense. After the deal closes, we’ll be watching Microsoft’s first quarter earnings in 2017 to see how the change affects LinkedIn’s reported income.