Is the market deluded about earnings?

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.

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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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