Alibaba Group Holding paid $5.6 billion in share-based compensation in the fiscal year 2018 which ended in March 2019.
Should investors be worried?
Alibaba calls its directors and managers ‘partners’. There were 190 partners in the fiscal year 2018, who are qualified for cash bonus and share-based compensation. Cash bonus is paid based on the performance of the company and those partners at the end of the fiscal year. Alibaba does not disclose the total cash bonus amount (We did not try to contact Alibaba!).
Share-based compensation is paid as restrictive. Alibaba has entered into share retention agreements with each partner. If a partner is granted shared-based compensation, he/she is required to hold 60% of it (including shares underlying vested and unvested awards) until three years and 40% of it thereafter until he/she remains a partner.
In the fiscal year 2018, Alibaba’s net income was $12 billion. Now, with the net income in mind, $5.6 billion of share-based compensation seems outrageous because it is almost half of the net income. Total share-based compensation expense included in the cost and expense items in fiscal year 2019 was RMB37,491 million (US$5,586 million), an increase of 87% compared to RMB20,075 million in fiscal year 2018. Share-based compensation expense as a percentage of revenue increased from 8% in fiscal year 2018 to 10% in fiscal year 2019.
There should be good incentives for smart minds to attract and retain in any companies. Tech companies are common players in this arena. Big techs in Silicon Valley have the same phenomenon. But, is there any limit to that? Alibaba’s officers are well compensated without share-based compensation and cash bonus. For the fiscal year 2018, Alibaba paid and accrued aggregate fees, salaries and benefits (excluding equity-based grants) of up to approximately RMB587 million (US$94 million) to their directors and executive officers. That is on average around half a million dollar per partner per year.
Currently, awards are only available for issuance under their 2014 Plan. If an award under the 2011 Plan terminates, expires or lapses, or is cancelled for any reason, ordinary shares subject to the award become available for the grant of a new award under the 2014 Plan. As of March 31, 2018, there were:
- 7,941,140 ordinary shares issuable upon exercise of outstanding options;
- 68,854,972 ordinary shares subject to unvested RSUs; and
- 29,376,187 ordinary shares authorized for issuance under the 2014 Plan; plus, on April 1, 2015 and each anniversary thereof, an additional amount equal to the lesser of 25,000,000 ordinary shares and such lesser number of ordinary shares determined by our board of directors.
These numbers are ostensibly mind-boggling and financially hurtful to the investors. A truly bitter medicine; I believe the patient needed it!
Share award by business segment.
Core Commerce – 47%
Cloud Computing – 12%
Digital Media – 8%
Innovation Initiative – 15%
Unallocated – 18%
Alibaba is a well managed company. It is run by its entrepreneur founders. Jack Yun MA and Joseph C. TSAI still head the company as Executive Director and Chief Executive Officer respectively. They have the majority of the voting rights. Naturally, they are awarded the highest share-based awards.
At the end of the Fiscal year 2017, their awards are as following.
Jack Ma – 208,334 shares (~ $33 millions)
Joseph Tsai -1,279,167 shares (~ $204 millions) *
*Buying price of $5 per share for 1,200,000 shares.
Full Detail (2017 10K- page # 181)
Ownership of the Company
- Jack Ma owns 6.4 %
- Joseph Tsai owns 2.3 %
- Softbank owns 28.8%
- Altaba owns 14.8%
In September 2018, Alibaba announced an ADS repurchase plan to implement the previously announced US$6 billion share repurchase program. As of the end of March 2019, they had repurchased approximately 10.9 million of their ADSs for a total of approximately US$1.57 billion.
On June 2, 2016, Alibaba entered into a share purchase agreement with SoftBank, pursuant to which they repurchased 27,027,027 ordinary shares from SoftBank at US$74.00 per share for an aggregate amount of US$2 billion. Members of the Alibaba Partnership, acting collectively, also purchased 5,405,405 ordinary shares from SoftBank at the same price per share for an aggregate amount of US$400 million.
Although, these share repurchases is seemingly offset by the heavy dilution of the share. As long as they can take advantage of this mouthwatering attractiveness of the award position to hire and retain the smart and bright individuals, it will be a profitable venture.