In the boom-boom days of the era, tech firms doled out compensation in the form of options. They were able to lower their cash costs by offering prospective and current employees generous packages of hopes and dreams for a happy future.

After the crash, accounting rules were changed to “expense” options – to calculate the cost of these option grants explicitly on a company’s income statement. Warren Buffett even through his two cents’ worth in on the issue. The method used to calculate option-related expense was to use the Black-Scholes option pricing model to find the theoretical value of a stock option, then deduct that from revenues as a non-cash cost.

For me – who understands the few strengths and many weaknesses of the Black-Scholes (and other) option pricing model(s) – this approach strikes me as being so bad that it is not even wrong.

Companies soon realized that applying the Black-Scholes model to the options they issued in their executive comp packages had a really depressing effect on profitability. As such, companies began switching to the issuance of Restricted Stock Units (RSUs).

From a company’s perspective, exchanging RSUs for stock options killed two birds with one stone: RSUs satisfied executive thirst for share compensation while having a more favorable accounting treatment than options.

Nowadays, many investors do not even think of the effect of stock compensation programs, but revel in company announcements of large stock buyback programs. From the research that I’ve done over the past 10 years, stock buyback programs, while they can be good for a company’s owners, are most often at least partially put in place to cover up the effect of compensation-related stock issuance. (We have a video explaining this process in the IOI Dashboard’s Video section entitled “Share Buybacks.”)

As part of our recent valuation and option investment recommendation in Apple, we took a look at the real cash effect of the company’s compensation-related stock issuance and was surprised by what we found. Over the last three years, the company has spent between $3 billion and $5 billion per year to soak up the dilutive effects of stock compensation – totaling over $10 billion of cash paid out of the profits earned by Apple’s owners.

We recorded a short video GreenLock of how to analyze the effect of “Anti-Dilutive Stock Buybacks” in the case of Apple and posted it for our subscribers and alumni of IOI Training programs. You would be amazed at the extent to which all large companies rely on “hidden” stock compensation programs and the huge cash flow effects these programs have!