Throughout most of the stock market's history, stock splits played a vital role in helping companies control share prices. Recently, though, many companies have stopped doing stock splits even when their share price has climbed to extremely high levels. Many investors had concluded that stock splits were becoming a thing of the past, but the most recent move from robotic-surgery pioneer Intuitive Surgical (NASDAQ:ISRG) to do a 3-for-1 split raised hopes that stock splits might finally be back in vogue. In particular, Intuitive Surgical cited a new reason for splitting shares that could apply equally well to a host of other companies that have thus far resisted making similar moves.

Why stock splits fell out of favor

Stock splits used to be an extremely common phenomenon among companies. Especially during bull markets, the inexorable upward movement of share prices led most companies to execute stock splits at fairly predictable levels. The $100-per-share mark was an especially common point at which to do stock splits, because triple-digit share prices made it expensive for rank-and-file investors to make trades in round 100-share lots. Companies used to cite retail investor liquidity and ease of trading as a key aspect of doing stock splits.

That largely changed in the 2000s, and two things made the old reasons for splits less appealing. First, the rise of discount brokers made trading in 100-share lots unnecessary. More investors moved toward smaller trades, and for them, it made little difference whether they bought 10 shares of a stock at $90 per share or a single share priced at $900. Meanwhile, some companies liked the idea of keeping their share prices high, in part because it demonstrated their long-term success every single day, and in part because volatility levels among high-priced stocks tended to be less extreme than for lower-priced stocks.

Two gloved hands working with a da Vinci surgical system.

Image source: Intuitive Surgical.

What changed at Intuitive Surgical

Indeed, even Intuitive Surgical has used those arguments against doing stock splits in the past. At a recent investor conference at which the company gave a presentation, Wedbush Securities analyst Tao Leopold Levy called out the company for its about-face on its stock split policy, noting that Intuitive Surgical has typically said that there's no compelling reason it would want a lower share price. In response, Intuitive Surgical executive Calvin Darling returned to the old narrative, citing retail investor liquidity and stock-price attractiveness as reasons for its 3-for-1 split.

However, Darling also made an argument that hasn't been as common among companies splitting their shares. In his words, "With a lower stock price, you can be more precise in the number of shares that employees can buy with their stock purchase plans or you grant with options" or restricted stock units. Darling's response noted that this was an important consideration, one that could arguably have outweighed any positive impact on retail investors.

Nearly every successful company uses equity-based incentives in one form or another, and so this justification could become a more commonly cited catalyst for future moves from other companies. In particular, companies in the technology arena where stock-based compensation is almost ubiquitous could start to see the potential benefits of a lower stock price in crafting pay packages for key employees.

Is $1,000 the new $100?

The question, though, is at what level a stock's price gets so high that equity-based compensation becomes an important consideration. The difference between $90 and $110 per share isn't particularly consequential, but for Intuitive Surgical, a share price above $1,000 might have made it difficult to reward lower-level employees with even a single share of stock on a regular basis.

Even looking beyond the employee compensation issue, Intuitive Surgical isn't the only company that has seen share prices approaching four-digit levels as a line in the sand to consider splits. MasterCard did a split in 2013 when shares were climbing toward $800. The tech sector leaders in online search and premium mobile devices both executed stock splits when their share prices traded in high three-digit levels.

Intuitive Surgical's move likely won't result in a huge number of new stock splits from companies trading at relatively low levels. But for the handful of stocks boasting share prices of $1,000 or more, the concept of equity-based pay could prompt similar moves at some point in the future. Investors should keep a close eye on stocks trading at nosebleed levels to see if they follow Intuitive Surgical's lead.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical and Mastercard. The Motley Fool has a disclosure policy.