When Employees Are Paid in Shares, Shareholders Still Pay: Michael Burry’s Nasdaq 100 Argument Explained

Michael Burry’s argument is simple, but uncomfortable.

He is not saying that technology companies are all bad businesses. He is not saying that every company using share-based pay is dishonest. He is making a narrower point:

When a company pays employees with shares, shareholders still pay the bill.

That bill may not leave the bank account immediately. It may not look like a normal salary payment. It may even be removed from the “adjusted profit” figures that many investors read. But economically, Burry argues, it still comes out of the shareholder’s pocket.

On 7 April 2026, Burry published a long article called “AP SBC: The Tragic Algebra Recurrence”, where he presented a model for adjusting the earnings of Nasdaq 100 companies for stock-based compensation. In plain English, stock-based compensation means paying employees with company shares or share options instead of only paying them in cash. Burry says this practice has made some technology companies look more profitable than they really are from the shareholder’s point of view. (1)

This article explains the idea. It does not try to prove that Burry is right about every company. It explains the mechanism so ordinary investors can understand the question for themselves.

1. What is stock-based compensation?

Imagine a company hires an engineer.

The company can pay the engineer in two ways.

First, it can pay cash: “Here is £100,000 salary.”

Second, it can pay partly in shares: “Here is £70,000 salary, plus £30,000 worth of company shares.”

The second method is called stock-based compensation, or share-based pay. I will mostly call it “share-based pay” because the idea is easier to see that way.

A share is a small piece of ownership in a company. If a company gives shares to employees, those employees become owners of part of the company.

That sounds harmless. In many cases, it can even be sensible. It helps companies attract talented staff. It can make employees care about the long-term success of the business. It can preserve cash when a company is young and growing.

But there is no magic. If employees receive shares, those shares come from somewhere.

They either increase the number of shares in existence, or the company has to buy shares in the market to replace them.

Either way, shareholders pay.

2. The two ways shareholders pay

Let us use a very simple example.

Suppose a company has 100 shares in existence.

You own 10 shares.

That means you own:

\[10 \div 100 = 10\%\]

Now suppose the company gives employees 10 new shares.

There are now 110 shares in existence.

You still own 10 shares, but now your ownership is:

\[10 \div 110 = 9.09\%\]

You did not sell anything. Nobody took money from your bank account. But your ownership fell from 10 percent to 9.09 percent.

That reduction is called dilution.

Dilution means your slice of the company becomes smaller because more shares have been created.

There is another possibility. The company may decide not to let the share count rise. It may buy 10 shares in the market and use them to offset the shares given to employees.

In that case, your ownership percentage may stay the same. But the company has spent real cash buying shares.

That cash could have been used for research, expansion, debt reduction, dividends, or genuine share buybacks that reduce the share count. Instead, it was used to stop dilution from employee share awards.

So the cost appears in one of two places:

If the company does nothing, shareholders pay through dilution.

If the company buys back shares to offset the dilution, shareholders pay through cash leaving the business.

Burry’s core point is that both outcomes are real costs.

3. Why adjusted earnings can be misleading

To understand Burry’s argument, we need to understand three different profit numbers.

The first is profit under standard accounting rules. In the United States, these are called generally accepted accounting principles, or GAAP. These rules already require companies to recognise compensation costs from share-based payment transactions in financial statements at fair value, so it is not correct to say official accounts completely ignore share-based pay. (2)

The second is adjusted profit. Companies often publish an adjusted number that removes certain costs. These adjusted figures are not illegal, but they are company-designed measures rather than standard accounting profit. The United States Securities and Exchange Commission says non-GAAP measures exclude or include amounts from the most directly comparable GAAP measure, and warns that some adjustments can be misleading if they change the way standard accounting recognition and measurement work. (3)

The third is what Burry calls owner’s earnings. This is not a standard accounting number. It is an investor’s attempt to answer a practical question:

“How much economic profit is really left for the owners of the company?”

That is the heart of the debate.

A company may say:

“Our standard accounting profit is lower because share-based pay is included. But share-based pay is non-cash, so we remove it from adjusted profit.”

Burry’s answer is:

“That is too convenient. Paying employees is not optional. If you pay them in shares, shareholders still bear the economic cost.”

4. A simple example

Let us build a small example.

Suppose a software company reports the following:

Revenue: £1,000
Cash salary and other costs: £700
Share-based pay: £100

Revenue means money the company receives from customers.

Costs mean money or value used to run the business.

Profit means what is left after costs.

Under standard accounting, the profit is:

\[£1{,}000 - £700 - £100 = £200\]

Now suppose the company presents an adjusted profit that removes share-based pay because it says the cost is “non-cash”.

Adjusted profit becomes:

\[£1{,}000 - £700 = £300\]

So the company can say:

“Our adjusted profit is £300.”

But Burry would say:

“No. The £100 paid in shares is still part of employee pay. The real owner’s profit is closer to £200, not £300.”

The difference is:

\[£300 - £200 = £100\]

The adjusted profit is higher than the owner-style profit by:

\[£100 \div £200 = 50\%\]

That does not mean the company committed fraud. It means the adjusted figure may make the business look more profitable than it feels to long-term shareholders.

5. The Nasdaq 100 version of the same problem

Burry applied this idea to the Nasdaq 100.

The Nasdaq 100 is an index of 100 large non-financial companies listed on the Nasdaq stock exchange. Many of them are technology or technology-related companies. The Invesco QQQ exchange-traded fund tracks the Nasdaq 100 index, which means investors who buy that fund get exposure to the companies in the index in one product. (4)

According to reporting on Burry’s article, he studied 97 of the 100 Nasdaq 100 companies over a ten-year period. His model produced three large numbers:

Standard accounting net income: about \$4.9 trillion
Adjusted earnings used by Wall Street: about \$5.8 trillion
Burry’s owner-style earnings after his share-based pay adjustment: about \$4.1 trillion

These are Burry’s model outputs, not official audited index accounts. But the calculation is easy to understand. (5)

The gap between Wall Street-style adjusted earnings and Burry’s owner-style earnings is:

\[\$5.8\text{ trillion} - \$4.1\text{ trillion} = \$1.7\text{ trillion}\]

That is the “\$1.7 trillion earnings illusion” claim.

The next question is: how much larger is \$5.8 trillion than \$4.1 trillion?

Step one:

\[\$5.8\text{ trillion} \div \$4.1\text{ trillion} = 1.4146\]

Step two:

\[1.4146 - 1 = 0.4146\]

Step three:

\[0.4146 \times 100 = 41.46\%\]

Rounded, that is about 42 percent.

So when people say Burry thinks adjusted Nasdaq 100 earnings are overstated by about 42 percent, this is the arithmetic:

\[\$5.8\text{ trillion} \div \$4.1\text{ trillion} \approx 1.42\]

In plain English:

For every \$1.00 of owner-style earnings Burry believes shareholders actually received, Wall Street-style adjusted figures made it look more like \$1.42.

6. Why this changes the price investors think they are paying

Investors often use something called the price-to-earnings ratio.

That sounds technical, but the idea is simple.

The price-to-earnings ratio asks:

“How many dollars am I paying for each dollar of company profit?”

The formula is:

\[\text{price-to-earnings ratio} = \frac{\text{market value}}{\text{earnings}}\]

If a company is worth \$300 billion and earns \$10 billion, then:

\[\$300\text{ billion} \div \$10\text{ billion} = 30\]

So the company trades at 30 times earnings.

That means investors are paying \$30 for every \$1 of annual profit.

Now apply Burry’s logic.

Suppose the market appears to trade at 30 times adjusted earnings.

But suppose adjusted earnings are 42 percent higher than owner-style earnings.

Then the true owner-style price-to-earnings ratio is higher.

The calculation is:

\[30 \times \left(\$5.8\text{ trillion} \div \$4.1\text{ trillion}\right)\]

First:

\[\$5.8\text{ trillion} \div \$4.1\text{ trillion} = 1.4146\]

Then:

\[30 \times 1.4146 = 42.44\]

So a market that looks like it trades at 30 times adjusted earnings could look closer to 42 times owner-style earnings under Burry’s model.

This is why the argument matters. It is not just an accounting argument. It changes the valuation.

Valuation means the price investors are paying compared with the real economic quality of the business.

If earnings are overstated, the same share price becomes more expensive than it first appears.

7. Nvidia’s reporting change matters because it shows the issue is real

Nvidia provides an important example because it recently changed how it presents adjusted earnings.

In its 25 February 2026 fiscal 2026 results, Nvidia said that beginning in the first quarter of fiscal 2027, its adjusted financial measures would no longer exclude stock-based compensation expense. In simpler language, Nvidia said it would stop removing share-based pay from its adjusted numbers. (6)

That is a significant move because Nvidia is one of the most important technology companies in the world.

Nvidia’s own fiscal 2026 release showed stock-based compensation of about \$6.386 billion, up from about \$4.737 billion in fiscal 2025. It also reported fiscal 2026 non-standard-accounting net income of about \$116.997 billion. (6)

The rough size of the share-based pay cost compared with that adjusted net income is:

\[\$6.386\text{ billion} \div \$116.997\text{ billion} = 0.0546\]

Then:

\[0.0546 \times 100 = 5.46\%\]

So Nvidia’s share-based pay was meaningful, but small compared with its enormous profit base.

That is why Nvidia can absorb the change more easily than many less profitable technology companies. A company earning huge profits can include share-based pay and still look very profitable. A company with thinner profits may look much weaker once share-based pay is treated as a real cost.

8. Why buybacks can be misunderstood

A share buyback means a company uses cash to buy its own shares.

In simple terms, a buyback can be good when it reduces the number of shares and increases each remaining shareholder’s ownership.

For example, suppose a company has 100 shares.

You own 10 shares.

You own:

\[10 \div 100 = 10\%\]

Now suppose the company buys back and cancels 10 shares.

There are now 90 shares.

You still own 10 shares.

Your ownership becomes:

\[10 \div 90 = 11.11\%\]

That is a genuine benefit to remaining shareholders.

But not all buybacks work like that.

Suppose the company gives employees 10 new shares and then buys back 10 shares from the market.

The share count starts at 100.

Employee share awards add 10.

The share count becomes 110.

The company buys back 10.

The share count returns to 100.

From the outside, investors may see a headline saying: “Company announces share buyback.”

But economically, the buyback did not reduce the share count. It merely cancelled out the dilution from employee share awards.

In that case, shareholders did not receive a true capital return. The company used cash to pay for employee compensation indirectly.

This is one of Burry’s most important points. A buyback is not automatically good. Investors must ask:

Did the buyback reduce the share count, or did it merely prevent the share count from rising?

9. Why this matters especially in technology companies

Share-based pay is common in technology companies because talented employees are expensive, competition for engineers is intense, and fast-growing companies often prefer to conserve cash.

There is nothing automatically wrong with that.

The problem appears when investors act as if share-based pay is not a real cost.

A restaurant cannot say:

“We paid our chef in free meals, so the chef cost nothing.”

A football club cannot say:

“We paid players in club shares, so wages do not matter.”

A software company should not be treated as if engineers paid in shares are free.

The form of payment changes. The cost does not disappear.

10. What investors should check

Burry’s thesis gives investors a useful checklist.

First, check how much share-based pay the company uses.

A good question is:

\[\frac{\text{share-based pay}}{\text{revenue}}\]

If a company has revenue of \$10 billion and share-based pay of \$1 billion, then:

\[\$1\text{ billion} \div \$10\text{ billion} = 0.10\] \[0.10 \times 100 = 10\%\]

That means 10 percent of customer revenue is being paid out through share-based compensation.

Second, check share-based pay compared with profit.

If a company earns \$500 million but pays \$800 million in share-based compensation, the company may look much better in adjusted figures than it feels to shareholders.

Third, check whether the number of shares is rising.

If share count rises year after year, shareholders are being diluted.

Fourth, check whether buybacks are real.

If the company spends billions on buybacks but the share count barely falls, the buybacks may simply be absorbing employee share awards.

Fifth, compare standard accounting profit with adjusted profit.

If adjusted profit is much higher because share-based pay has been removed, investors should be cautious.

The company may still be good. The share may still be worth owning. But the investor should understand what they are paying for.

11. The nine-company warning list

Burry reportedly identified a group of companies where, under his model, the cumulative economic cost of share-based pay was especially severe. The reported list included Tesla, Palantir, CrowdStrike, Datadog, Axon Enterprise, Workday, Zscaler, Shopify, and Marvell Technology. (5)

The purpose of naming these companies is not to say every one of them is worthless.

Some of them may have strong products, talented employees, high growth, and real competitive advantages.

The point is narrower:

A great business can still be a bad investment if shareholders pay too high a price or if too much of the economic value is transferred away from them.

That is the core of Burry’s warning.

12. The lesson for ordinary investors

The cleanest lesson is this:

Do not stop at adjusted earnings.

Adjusted earnings can be useful. Sometimes they remove genuinely unusual items. But when they remove normal employee compensation, investors should be careful.

Paying employees is not an unusual event. It is one of the most basic costs of running a business.

If a company pays employees in cash, everyone accepts it as a cost.

If a company pays employees in shares, the cost is less visible, but it is still there.

Shareholders pay either through dilution or through buybacks that use company cash to prevent dilution.

This is why Burry’s argument is powerful. It takes a complicated accounting issue and turns it into a simple ownership question:

After employees, executives, taxes, reinvestment, and dilution, how much value is really left for the shareholder?

That is the question every investor should ask.

The answer will not be the same for every company. Some companies use share-based pay responsibly. Some generate so much cash that the cost is manageable. Others may depend on adjusted numbers that make the business look more profitable than it really is.

But once an investor understands the mechanism, they can no longer look at share-based pay as free.

It is not free.

It is paid for by the owners.

When Employees Are Paid in Shares, Shareholders Still Pay: Michael Burry's Nasdaq 100 Argument Explained