Stock compensation is a mechanism that companies use to reward employees. Instead of simply offering cash, companies offer employees stock or stock options to take partial ownership of the company and potentially share in its profits.
With phenomenal growth in a relatively short time frame, North American-listed Bitcoin mining companies appear to have rewarded themselves extremely well when compared with other mainstream tech firms.
The table below highlights the levels of stock or share-based compensation provided from their most recent Form 10-Q (or equivalent) submissions in 2022 and for the corresponding period in 2021.
The corresponding extracts for Alphabet Inc (GOOG), Microsoft (MSFT) and Meta Platforms (META) are also included to show as a comparison from the established technology sector. It should be noted that these three companies made significant profits during both periods.
The majority of the North American-listed Bitcoin miners were making significant profits during the heady days of the last Bitcoin bull cycle. As such, the levels of compensation awarded during 2021 were also on the increase, where compensation awarded levels reached an average of 30% of total revenues.
For example, during the first nine months of 2021, Marathon Digital issued more than $152 million in share-based compensation compared to $1 million issued in the same corresponding period in 2020. Indeed, the rise in market capitalization from $500 million to $8 billion over the same period triggered an enormous amount of performance rewards.
Stock compensation types
There are a number of types of stock compensation that companies can award to their employees. Stock options or restricted stock units (RSUs) are the most common, and both generally require a vesting or locking-in period. RSUs are given for free to the recipient, whereas stock options are the right to buy the shares in the future at a discounted price, after the vest period.
Performance shares can also be issued as a form of stock compensation, generally granted to managers and executives if performance criteria are met. For Bitcoin miners, this could be linked to growth in hashrate over a defined period or earnings per share.
In each reporting period, Bitcoin mining companies focus on the financial metric ‘Adjusted EBITDA,’ which measures a company's operating performance by excluding certain non-cash and non-recurring items like share compensation or impairment of goodwill, for example, sometimes often clouding the real financial position. It would be prudent to note that this term is not a recognized accounting metric by any accounting body and should be used in conjunction with other approved financial metrics when evaluating the context of a company's specific financial situation.
Risks and benefits
The benefits of companies issuing stock compensation is that it should align the interests and goals of employees with those of the company, and incentivize employees to work toward the company's success, which will benefit both the company and its shareholders. It’s also used as a retention tool, as it provides employees with a stake in the company and the opportunity to benefit from the growth and success of the company, potentially leading to a significant financial gain.
However, there are some risks and concerns, such as 1) stock compensation dilutes existing shareholders’ ownership and voting power, 2) the value of the stock can fluctuate greatly and can result in a significant decrease in value and 3) it can create a short-term focus for management, potentially leading to decisions that prioritize short-term gains over long-term success.
This last point could be perceived as more relevant when you consider some of the decisions made by Bitcoin miners around their growth strategies over the past two years, and the timing of debt, dilution and selling Bitcoin to grow their hashrate.
Although stock compensation is a tool to ensure that the goals of the employees remain in line with the goals of the company, it also remains a significant expense for shareholders in a space where salaries and bonus payments already appear to be extremely competitive.
What should be understood is that companies, and therefore the shareholders, could end up effectively paying too much for employees as the stock-based compensation can become exponentially lucrative, such as during a Bitcoin bull run. It should, therefore, always be the case that stock-based compensation and shareholders’ expectations are mutually aligned.