Earnings quality · updated October 21, 2026
What is dilution from stock-based compensation
Many companies, especially in tech, pay part of their salaries in shares. The new shares shrink every shareholder's slice of the company. Dilution shows how much your slice shrinks each year, even if you sell nothing.
Dilution from stock-based pay formula
- Stock-based pay
- The value of shares and options granted to employees, from the cash flow statement.
- Market cap
- The value of all shares on the market.
Worked example
A company is worth $200 billion and gives employees $6 billion of shares a year.
Over 10 years at 3% a year, a shareholder's slice shrinks by almost a quarter, unless the company buys back shares.
How to read dilution from stock-based pay
Buybacks can offset dilution. Compare dilution with the money spent on buybacks.
When dilution from stock-based pay can fool you
"Adjusted" profit: many companies leave stock-based pay out of the profit they present, as if it were not a cost. For shareholders it is.
Related terms
Questions about dilution from stock-based pay
Why is stock-based pay a real cost?
Because the new shares shrink your share of profit and dividends, just as if the company had paid salaries in cash and issued shares to raise that cash.
These explanations are for information only. They are not a recommendation to buy or sell.
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