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In an article in the New York Times, PayPal has been criticised for adding back the costs of stock-based compensation to its unconventional earnings calculations.

The article states that under generally accepted accounting principles, PayPal reported operating income of $430 million in the second quarter of 2017. That was up almost 16 percent from the $371 million it produced in the same period last year.

But under PayPal’s alternative accounting, its non-GAAP operating income was $659 million in the June quarter, an increase of almost 25 percent from 2016.

According to the article, Craig Maurer, a partner at independent investment research firm Autonomous in New York, rates PayPal’s stock an underperformer.

Maurer is critical of how the company accounts for stock-based pay, saying that as a percentage of PayPal’s non-GAAP operating income, stock-based compensation has risen to 29 percent this year from 17 percent in 2015.

“They are literally taking a cost out of their income statement, moving it to a different line and backing it out of results,” Mr. Maurer said in an interview. “And you can see that it’s adding significantly to their ability to meet earnings expectations. If you backed out the difference between what we were expecting on stock-based comp in the quarter versus what they reported, it was 2 cents of earnings.”

In other words, the increase in stock-based compensation made a big contribution to PayPal’s results versus what analysts had been expecting.

Amanda Miller, a PayPal spokeswoman, declined to discuss why the company was raising its stock-based pay, and the role the increase played in the company’s recent results.

PayPal’s stock-based compensation practices have another noteworthy effect: They drive executive pay higher at the company. Here’s how.

The company says it has three main metrics for calculating its managers’ performance pay each year. One of those measures, its proxy shows, is non-GAAP net income. So, as PayPal awards more and more stock to its executives and employees, non-GAAP net income shows better growth. And the greater that growth, the more incentive pay the company awards to its top executives.

Read the full article here.