Kevin Koharki, PhD: What Stock-Based Compensation Really Costs -- The Billions That Never Show Up on the Books
Talking Billions with Bogumil Baranowski
Example: true buyback cost and adjusted free cash flow
Kevin adjusts buyback and tax costs, reducing apparent free cash flow from $46B to about $4B in his example.
Kevin Koharki, MBA, PhD, is the founder of CAE Consulting (Capital Allocation Enhancement), associate professor of accounting at Purdue University, and expert financial analyst with a 20-year career — including M&A analysis — who consults with and advises Fortune 100 companies on understanding the true economic cost of stock-based compensation.
The episode is sponsored by TenzingMEMO — the AI-powered market intelligence platform I use daily for smarter company analysis. Code BILLIONS gets you an extended trial + 10% off.
3:00 — Kevin traces the origins of stock-based comp to the 1990s dot-com era; originally meant to conserve cash at startups and align employee incentives with shareholders.
5:00 — The shift from stock options to RSUs and PSUs; accounting still at the expensing stage from 2002 FASB rules.
7:00 — Why stock-based comp is concentrated in the tech sector, particularly Mag-7 companies — the very firms that don’t need to conserve cash.
10:00 — Kevin walks through the mechanics: 100 RSUs granted at $30, expensed over three years, but if sold at $90, the $60 gap never appears on the P&L.
14:00 — Cash flow distortion: compensation paid in shares shows up as a financing activity, not an operating expense — inflating free cash flow.
17:00 — Why employees don’t truly become owners: tax liabilities force selling, and short-term vesting creates a “what’s my vest date?” mentality.
19:00 — The Berkshire model: Greg Abel buys shares with after-tax salary. No stock-based comp. Buffett’s emphasis on intrinsic value per share.
23:00 — Psychological toll: employees hired at the peak face crushing drawdowns; companies respond by issuing even more shares.
28:00 — Real-world example: a company with $102B in operating cash flow shows $6.4B in GAAP SBC — but $7.9B just in tax withholdings. The tax cost exceeds the recorded expense.
35:00 — Second example: 90% of a $26.3B share buyback was simply to offset dilution. True free cash flow drops from $46B to roughly $4B.
42:00 — The private company test: “If you bought the whole company, you’d still have to pay those employees in cash.”
50:00 — The IRS treats SBC as cash-basis: the $90 exercise price gets the deduction, not the $30 GAAP cost.
58:00 — Kevin: “I just think there’s kind of a mass delusion going on right now.”
1:03:00 — Wall Street Journal coverage and Nvidia’s disclosure change; the conversation is shifting.
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Blue Infinitas Capital, LLC is a registered investment adviser and the opinions expressed by the Firm’s employees and podcast guests on this show are their own and do not reflect the opinions of Blue Infinitas Capital, LLC. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
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