Every public company pays some of its people in stock, and most boards review that spending the same way. They look at what other companies pay, and they check that the plan will get past the proxy advisors. Those are fair questions, but they only ask whether the pay is normal. They never ask whether the company can afford it.
Equity compensation is a real cost. It comes straight out of reported earnings. The new shares behind it also slice the pie thinner for everyone who already owns the stock. A company can truly pay for that cost in only one way, and that is by growing into it. So the question a board should ask is simple: did we?
We asked that question of every company on the NYSE and Nasdaq for the past five years. Most of them did not grow into their grants, and the gap has gotten wider every year. The tools boards use to keep it in check were never built to catch it. Here is what we found, and what comes next.
A simple test any board can run
Together with Compensia, Carver Edison built a new, simple test. It asks one question. Did the company add enough new revenue, at its own profit margin, to earn back the stock it gave employees? Both numbers come straight from the annual report. If the new revenue covered the grants, the equity paid for itself. If it did not, shareholders picked up the difference.
Company A, payments, twelve months to June 2026
Amount
- Equity compensation
- $1.2 billion
- New sales needed to earn it back, at a 1.4% margin
- $84 billion
- New sales actually added
- $73 million
The company needed $84 billion of new sales to pay for one year of stock grants, and it added $73 million. That does not make it a bad business. Its grants simply ran far ahead of what it earns. And because the stock trades at a rich multiple, the market value tied up in those grants runs into the tens of billions.
Seven in ten profitable companies failed the test
Run the same test across the whole market and the picture is clear. In fiscal 2025, 72% of profitable U.S.-listed companies added less new revenue than their equity compensation required. Back in fiscal 2021, less than half missed. Add in the companies that paid out stock while losing money, and more than eight in ten had a problem. They either failed the test or had no profit to test against.
Share of profitable companies that failed the test
Revenue added was less than equity compensation divided by net margin
How far short are they falling? The typical company now covers only about 38 cents of every dollar of stock it grants. Four years ago it covered more than a dollar. And this is not a one-year blip. We followed 710 companies that stayed profitable every year from fiscal 2022 through 2025. Three in ten missed in all four years, and more than half missed in at least three.
How much of each dollar of stock the typical company covered
Median coverage ratio: revenue added divided by sales required
The companies that missed every year handed out $422 billion of stock over that stretch. The companies that passed every year handed out $22 billion. The big grants of 2021 became the new normal, and most companies never grew into them.
Why the spending keeps climbing
Across the companies we could track over the full five years, equity compensation rose 47% while revenue rose 31%. The stock grew a lot faster than the businesses paying for it. The spending is also lopsided. More than half of companies spend very little of their revenue on equity. A small group spends more than a fifth of everything they bring in.
Five-year growth, same 3,624 companies
FY2021 to FY2025
Much of the climb comes from quiet design changes, and each one raises the yearly cost of the very same grant. Stock options turned into full-value shares. Yearly vesting turned into quarterly vesting. Four-year schedules turned into three-year schedules. And a growing number of companies moved to front-loaded vesting, which pulls the cost forward into the early years.
Each of those changes solves a hiring problem, but none of them solves a spending problem. The guardrails boards count on were not built to catch it either. Proxy advisors use fixed thresholds and look backward, and their automatic triggers only fire at very high levels of dilution. A company can pass every one of those tests and still fail the only test that matters to its own income statement.
Shareholders felt it. We paired four under-earners with a direct peer in the same industry. In every pair, the company that failed the test trailed its peer in total return since the end of 2020, sometimes by a wide margin. Every peer that passed spent less of its revenue on stock and earned a higher margin. The under-earners are not bad businesses. Their grants simply outran their economics.
What this is worth to shareholders
The same test runs in reverse. Take a dollar of equity compensation off the income statement, and most of it lands in net income after tax. The market values a company at a multiple of its earnings. So every dollar of expense removed is worth many dollars of market value. At a typical multiple, removing $100 million of yearly equity compensation is worth well over a billion dollars of market value. The employees’ awards do not change. For the largest issuers, the figure runs into the tens of billions.
That is why this is not just an accounting question. It is a shareholder value question, and it sits on the desk of every board.
Does your equity plan pay for itself?
Pull equity compensation and net margin from your last 10-K. Ask how much new revenue it would take to earn the grants back, then compare that with the revenue you actually added. The answer tells you whether your equity plan is paying for itself. If it is not, it tells you how much shareholders are covering.
Statements about program outcomes are not guaranteed and depend on company-specific factors, participation and market conditions. Accounting treatment and availability depend on plan structure and jurisdiction. Program fees apply. Market data: SEC EDGAR filings, 5,336 NYSE and Nasdaq listings, FY2021-FY2025; survivorship bias applies; cash-flow SBC proxies expense, not grants or dilution; no causation is claimed. Methodology: Carver Edison Research
