Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

"For the Last Time," screamed the Harvard Business Review headline. "Stock Options Are an Expense."

Yes they are, professors. Yes they are. International Ltd. announced earnings early Thursday and the results were stellar. Look closer, though, and it's apparent just how correct Zvi Bodie, Robert S. Kaplan and Nobel Laureate Robert C. Merton were in that article 14 years ago.

Fourth-quarter net income attributable to shareholders was 645 million yuan ($94 million), Ctrip reported. Excluding share-based compensation charges, that figure would have been almost double at 1.2 billion yuan, it said.

Share-based compensation (SBC) has long weighed on the earnings of Ctrip and numerous other companies around the world. There are many valid arguments for why companies should use shares, or their derivatives, to reward employees. If they didn't use equity, then they'd have to boost cash salaries to attract and keep staff. Stock-based compensation, or SBC, has the added benefit of tying pay to performance.

At Ctrip, however, SBC costs jumped fourfold in the space of one year. That's mainly because China's largest online travel site bought Baidu Inc.-backed rival Qunar Cayman Islands Ltd. in the last quarter of 2015.

Cost of Labor
Pretax share-based compensation jumped after Ctrip's acquisition of Qunar
Source: Bloomberg

The purchase boosted Ctrip's top line noticeably, helping it increase full-year sales by 76 percent in 2016 compared with 48 percent growth the year before.

Buying Revenue
Ctrip's purchase of Qunar helped boosted sales starting in the first quarter of 2016
Source: Bloomberg

Yet the scale of the revenue increase doesn't match the jump in share-based compensation. In fact, from an average 6 percent of sales in 2015, those costs represented 11.4 percent in the final three quarters of 2016.

Relative Compensation
Ctrip's stock-based compensation as a percentage of revenue spiked, and remained higher in subsequent quarters following the Qunar purchase
Source: Bloomberg

That calculation excludes the first-quarter spike to 44 percent of sales, which initially looked like it would drop back to previous levels. Now it's apparent that higher SBC costs are structural and will probably be borne by the company for some time.

Investors must watch out for whether those awards will need to be adjusted. By way of example, Ctrip made changes to the expiration dates of previously issued stock options in 2009 and 2010, which hit earnings in those years.

Stock-based compensation is a great way to attract and provide incentives to employees, but never forget that it's a cost that has to be monitored.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Ctrip's 2015 annual report states: "We have granted share-based compensation awards, including share options and restricted share units, to employees, officers and directors to incentivize performance and align their interests with ours."

  2. If counting the first quarter, the ratio would have been 19.5 percent for the year

To contact the author of this story:
Tim Culpan in Taipei at

To contact the editor responsible for this story:
Matthew Brooker at