“The pairing of SBC and buybacks can reduce and increase agency costs. They reduce agency costs if executives and other employees are aligned with shareholders and the company returns cash to shareholders rather than wasting it on investments that destroy value. They increase agency costs if they are an inefficient means to pay employees and the company buys back stock to manipulate accounting results with no regard for economic value.”
– Mauboussin, M. and Callahan, D., Morgan Stanley, 2023
Agency theory is more than just theory. Poor governance has very real effects.
The potentially antithetical motivations of principals and agents in agency theory pose a fundamental challenge for corporations seeking to align the incentives of management (and employees) with those of owners. One widely practiced solution is the issuing of stock-based compensation (“SBC”) to executives, managers, and other employees. The premise being that making these parties shareholders as well, even to a small extent, will better line up the incentives of agents with those of owners, thus soliciting more commitment, longevity, and productivity toward the goal of value maximization, as well as reduce other agency costs (such as monitoring, legal, and replacement costs).
Jensen and Meckling (1976), discussing the agency costs of equity, acknowledged a gap between the interests of outside shareholders (pure principals) and those of an owner-manager (in our discussion represented by the recipients of stock-based compensation) because the owner-manager will “bear only a fraction of the costs of any non-pecuniary benefits [they take] out in maximizing [their] own utility.” Unlike agents with no ownership stake, for those who own equity in their respective firms there is at least some cost – a situation generally deemed to be an improvement.
But how has this played out in practice? Has stock-based compensation led to other unintended consequences, such as short-termism, financial engineering, and a possible undermining of the very alignment of incentives that it was meant to produce? To shed light on the effectiveness of this widely used tool in aligning principal and agent incentives, here we’ll analyze and contrast Apple and Meta’s history of stock-based compensation payouts, the degrees to which these firms offset the related share dilution through stock buybacks, and their utilization of free cash flow for these purposes.
COMPARING APPLE & META’S COMP STERILIZATION
Apple and Meta are admittedly different firms. Apple is primarily a technology hardware producer, with products such as iPhone, Mac, iPad, and wearables making up 75% of its revenue in 2024, although services revenue has been an increasing part of revenue generation in recent years (Apple, Inc., 2024). Meta is a social media platform company with essentially all its revenue generated from advertisements placed on its family of apps, with the majority of that from Facebook and Instagram (Meta Platforms, Inc., 2025). Both Apple’s revenue and market cap are over twice those of Meta. However, these differences are not material for the purpose of our analysis. As detailed below, the relative measures of payout, offset, and use of FCF allow relevant comparisons and are usefully illustrative.
Research was conducted for the last 10 years to compare the two firms’ stock-based comp, dilution of outstanding shares, utilization of stock buybacks to offset that dilution, percent of FCF used in the payment of stock-based comp, and finally, the net amount of FCF that was paid to shareholders. All data is from 2015-2024 10-Ks for both firms(1).
The analysis paints two very different pictures. Apple’s SBC and buyback policies have been responsible and judicious, prioritizing shareholders while compensating Apple’s people – the ideal goal of stock-based compensation. Meta’s data, aside from a couple of years, show quite the opposite. There are four metrics (all ratios, so easily comparable) that crystallize the effects of the firm’s SBC and buybacks (see Figure 1):
1. Total Net Share Reduction (ostensibly the goal of stock buybacks),
2. Buyback Sterilization (how much of buybacks went to cover issued shares),
3. SBC as a % of FCF (how much of FCF is used for SBC and associated taxes), and
4. Total Return to Shareholders as a % of FCF.
Here we see how these key metrics compare for our two firms:
Figure 1: AAPL vs. META, key metrics
Apple’s responsible deployment of SBC and its prioritization of shareholders is apparent. Over the last decade, they have reduced outstanding shares by 35%, utilizing only 13% of their buybacks to offset dilution from SBC – that at a cost of only 15% of free cash flow (money spent on buyback sterilization plus the cash spent on taxes associated with SBC issuance). In fact, when accounting for net buybacks (after sterilization) and dividends, Apple has paid out over 90% of FCF to shareholders – a veritable ATM.
Meta’s metrics tell a different story. After spending $148 billion on buybacks over eight years (it only started buybacks in 2017 – before that, it was pure dilution), Meta only reduced its float by a paltry 3.9%. This is because, over the past decade, 82% of its stock buybacks went directly to sterilization of SBC and offsetting dilution, consuming 64% of free cash flow over the period. This meant just 12.7% of FCF went to shareholders through net buybacks and dividends. Granted, Meta just paid its first dividend in 2024 (dividends made up 24% of Apple’s cash paid to shareholders over the decade); however, if we were to exclude Meta’s somewhat improved 2021 and 2022 fiscal years – in which only about a third of buybacks went to sterilization (still more than double Apple for those two years) – then all of Meta’s buybacks would have been cannibalized for sterilization over the decade and they would have paid a mere 2.6% of FCF to shareholders. In fact, since 2022, Meta seems to be returning to its earlier ways, with 100% of 2024 buybacks going to sterilize issued SBC shares, and the percentage of FCF used to cover SBC is at an all-time high (82%).
The common financial news narrative around buybacks is that they are a great use of cash. They are tracked, reported on, and touted by pundits and on earnings calls as shrinking the outstanding share count and thereby increasing earnings per share – an influential metric in valuations and buy decisions. But here we see that buybacks often do little more than offset the stock dilution from SBC issuance. Meta actually spent $40 billion (or 35%) more cash on SBC sterilization (buybacks and associated taxes) in just eight years than Apple did in ten, on top of the billions already spent on salaries. The net effect was a reduction in shares outstanding of only 4% over a decade. This is not the track record of a management team that is well aligned with ownership.
ALIGNING WITH, AND IGNORING, SHAREHOLDERS
In 2022, Apple’s most recent SBC plan was approved by 97% of shareholder votes (Apple, Inc., 2022b), emphasizing their satisfaction with the firm’s reasonable issuance of stock for compensation. The shareholders clearly feel that Apple’s management is giving precedence to owners’ interests – and that the agency cost of $121 billion, and 15% of FCF, over the last decade is reasonable.
Meta, however, has a somewhat unique share class structure that effectively silences all outside shareholder demands. Meta’s founder, Chairman, and CEO, Mark Zuckerberg, only owns roughly 13% of total Meta shares but has 61% of total voting power thanks to his owning essentially all (99.7%) of Class B shares, which receive 10 votes per share (Meta Platforms, Inc., 2024b). Of the 17 stockholder proposals in the 2023 and 2024 proxy votes, six sought, in some form, to rectify this power imbalance (see Figure 2). Unsurprisingly, all were soundly defeated. However, if we remove the Class B votes, five of the measures would have been easily approved, with one narrowly failing to pass 49% to 51%.
Figure 2: META 2023-24 shareholder governance-related voting (Meta Platforms, Inc., 2024b, 2023b)
CONCLUSION: SHAREHOLDER “DISCIPLINE”
Justin Fox and Jay Lorsch (2012, Harvard Business Review, pp.49-57), when discussing the corporate “discipline” role of shareholders, suggested that they “have only two major tools at their disposal – selling shares or casting votes.” Fox and Lorsch quickly dismissed selling because “it’s awfully hard for one shareholder, even a big one, to have a discernible impact” (Fox, J. and Lorsch, J., 2012), which is even more true now with the continued rise of index investing eliminating much of the decision making from the end investor. Indeed, the only sizeable owners of Meta apart from Zuckerberg are BlackRock, Fidelity, and Vanguard (Meta Platforms, Inc., 2024b). Regardless, studies have questioned the effectiveness of divestment in the secondary equity market (Chambers, D., Dimson, E. and Quigley, E., 2020; Ansar, A., Caldecott, B., & Tilbury, J., 2013; Quigley, E., 2019). This leaves voting.
Tellingly, as seen above, Meta’s most recent vote on a “change in shareholder voting”, which seeks to phase out 10-1 voting rights, giving all shares one vote, would have passed by an estimated 85% of Class A shares. This particular change has been proposed by stockholders every year since 2014 (Jones, R., 2023) – the entirety of the period covered by our SBC sterilization analysis, a decade of futility.
In addition to the issues of SBC and buybacks, this prevents action on any other concerns the shareholders might wish to prioritize. This is particularly relevant in the case of Meta, as recent stockholder proposals have included addressing data privacy, the effect of social media on minors, misinformation in the political sphere, the risks of AI utilization, lobbying, and climate action (Meta Platforms, Inc., 2024b, 2023b), all of which have been defeated(2). The election of board members is similarly dominated by Zuckerberg’s voting power – he alone decides. His effective stranglehold on the proxy process unilaterally eliminates any course of action that he, personally, might not wish the firm to take, undermining the entire purpose of shareholder voting, namely, helping to address the agency problem.
Of course, one could say to Meta shareholders, caveat emptor. The unequal class voting mechanism has been in place since Meta went public in 2012 (Jones, R., 2023), and a few other firms have a similar share class structure, such as Google.
Apple, unsurprisingly, does not. And tellingly, Warren Buffet’s Berkshire Hathaway’s top holding is Apple, with it making up 23% of his portfolio as of 2024 year-end (CNBC, 2025), even after selling two-thirds of Berkshire’s holdings in late 2024 (Moorhead, C., 2025) – still a ringing endorsement. Of course, the arrow of causality is uncertain. Does Apple stay the course due to Buffet’s investment and influence, his discipline? Or has Berkshire remained invested because of Apple’s continued prioritization of benefits to shareholders? Either way – if Apple listens to one of its largest shareholders, or if Buffet is an owner because Apple does right by its investors – the fact remains that Apple is a model of principal/agent alignment and responsible stewardship.
Footnotes:
- Apple operates on a calendar fiscal year; Meta’s fiscal year ends in Q3. Apple’s data covers 2015 through 2024, inclusive, while Meta covers Q3 of 2014 (via the 2015 10-K) through Q3 of 2024. Both cover a full 10-year period.
- These stockholder proposals did not garner the same levels of support as the initiatives concerning governance changes. Most would have failed in the Class A share voting alone, but the point is moot. The issue remains – barring changes, no issues can be advanced without Zuckerberg’s acquiescence regardless.
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