You wouldn't know that if you only glanced at LinkedIn's news releases. That's because LinkedIn steers investors to focus on what's known as its adjusted Ebitda, or non-GAAP earnings. The company purposely strips out the cost of stock-based compensation, which has the effect of turning losses into gains. LinkedIn paid out $510 million in stock-based compensation last year; over the last two years, that stock-based compensation represented a whopping 96 percent of operating income, or 16 percent of revenue, according to Mr. Mahaney. Companies like Google, Amazon and Facebook paid out about 15 percent of operating income, or well under 10 percent of revenue.
LinkedIn justifies the practice by saying that stock-based compensation "is noncash in nature" and that excluding it from its earnings calculation provides "meaningful supplemental information regarding operational performance and liquidity."
But investors like Warren E. Buffett have been highly critical of the practice. "It has become common for managers to tell their owners to ignore certain expense items that are all too real," Mr. Buffett wrote in his annual report published this year. Stock-based compensation, he said, "is the most egregious example. The very name says it all: 'compensation.' If compensation isn't an expense, what is it? And, if real and recurring expenses don't belong in the calculation of earnings, where in the world do they belong?"
Mr. Buffett also criticized analysts who "play their part in this charade, too, parroting the phony, compensation-ignoring 'earnings' figures fed them by managements."
In April, Facebook, which also used to steer investors to use adjusted-Ebitda earnings numbers that also excluded the cost of stock-based compensation, announced that it was changing its policy. "Stock-based compensation plays an important role in how we compensate our employees, and therefore we view it as a real expense for the business," David Wehner, Facebook's chief financial officer, said in an earnings call.