As a shareholder, I generally like a lot of what Twitter Inc. (NYSE:TWTR) is doing, but there is one aspect of the company that continues to irk my sense of fairness -- the amount of stock compensation doled out to its employees.

The company's practice of using shares to bulk up pay to its employees continues to make my small stake in the company even smaller. Here is a look at how Twitter compares to its Silicon Valley neighbors when it comes to stock compensation and diluting its shareholders.

Employee stock compensation

Silicon Valley is the land of entrepreneurial high-tech start-ups. Part of its allure is the ability for employees to get rich through ownership of the next big thing. Management competes for and incentivizes employees to drive these companies forward by making stock options and stock grants a part of their compensation package.

It makes sense from the company's perspective as this portion of employee compensation does not create a draw on the company's cash balance. Instead the company simply issues stock at the appropriate time. 

Here is the problem. When a company increases its shares outstanding, to provide shares for employee stock or options, the increased number of shares dilutes all shareholders. 

Twitter white bird on blue background.

Image source: Twitter.

Twitter's stock creation looks excessive

Between the end of 2014 and last year Twitter saw an over 12% increase in its share count. To be fair a small portion of that number were for shares used to fund an acquisition. It ended Q2 of this year with over 730 million GAAP diluted shares.

Metric 2016 2015 2014
Shares outstanding at end of the year 721.572 million 694.132 million 642.385 million

Data source: Twitter. Chart by author.

The company breaks down its stock-based compensation by function for its more than 3200 employees. As one might expect R&D receives the bulk of stock compensation, more than 50%, as the company needs to attract high quality engineers and computer scientists.

Function 2017 Q1 and Q2 2016
Cost of revenue $12.2 million $29.5 million
Research and development $128.0 million $335.5 million
Sales and marketing $45.8 million $161.0 million
General and administration $44.4 million $89.3 million
Total stock based compensation expense $230.4 million $615.3 million

Data source: Twitter. Chart by author.

Comparing Twitter to its neighbors

Looking at other companies like Yelp (NYSE:YELP), Netflix (NASDAQ:NFLX), and Salesforce (NYSE:CRM) makes it clear that Twitter's management is particularly generous regarding stock based compensation. To equalize companies of different sizes here is a comparison looking at stock based compensation as a percentage of revenue for each Silicon Valley company for its most recently completed fiscal year.

Metric Twitter Inc.  Yelp Inc Netflix, Inc.  salesforce.com, inc. 
Stock based compensation $615.3 million $86.3 million $173.7 million $820.4 million
Revenue $2529 million $713 million $8831 million $8392 million
Stock based compensation as a percentage of revenue 24% 12% 2% 10%

Data source: Twitter, Yelp, Netflix, and salesforce. Table by author.

Twitter pays a much higher amount of stock based compensation as a percentage of revenue than its neighbors by a wide margin.

One of the reasons very well may be the company's poor stock performance. Twitter stock has not done very well since its IPO in November 2013. Twitter management may be overcompensating with volume to make up for what employees perceive as less potential for upside reward based on the stock's history.

TWTR Chart

TWTR data by YCharts

Twitter's CEO pitches in

CEO Jack Dorsey took the unusual step of handing some of his own personal shares over to the pool of stock that can be issued for employee stock compensation. He made the move to reduce the burden of dilution from shareholders and at the same time reward employees.

His gift of 6.8 million shares is equal to approximately a quarter's worth of the increase in outstanding shares that occurred in 2016.

Dorsey's move is an acknowledgement that it is difficult to sell shareholders on dilution when the value of the stock keeps falling. The company has also made a conscious effort to reduce employee stock based compensation over the past year which can be seen in its stock based compensation by quarter.

Metric Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
Stock based compensation $113.4 million $117.0 million $138.1 million $158.5 million $167.7 million

Data source: Twitter. Chart by author.

With the company still seeking growth, it's unlikely that Twitter would use some of the $3.6 billion in cash on its balance sheet to go into the market and buy back a meaningful amount of its stock. In light of this, Dorsey's move makes even more sense.

As a shareholder, I'm happy to see the CEO stepping in and to see stock-based compensation generally trending down, but it's still something I'm going to be watching in the coming quarters. 

Frank DiPietro owns shares of Netflix and Twitter. The Motley Fool owns shares of and recommends Netflix and Twitter. The Motley Fool recommends Salesforce.com and Yelp. The Motley Fool has a disclosure policy.