Investing.com -- As competition for artificial intelligence expertise intensifies, stock-based compensation (SBC) is becoming a key tool for technology companies to attract and retain talent, according to Morgan Stanley.

The bank said in a note to clients this week that "SBC has emerged as a critical lever in the competition for top-tier talent."

"Like capex, SBC is a capital allocation decision that can either drive innovation or dilute shareholder value if mismanaged," stated the bank.

Morgan Stanley highlighted that AI "may reduce headcount over the longer term, but near-term labor costs are up as AI Enabler firms such as META and AVGO ramp SBC-driven hiring post-ChatGPT."

It added that SBC now represents an increasing share of the cost structure at Meta (NASDAQ:META), Oracle (NYSE:ORCL), and Broadcom (NASDAQ:AVGO), and "may become the next investor concern after capex."

The report noted differences in approach among large players. "MSFT's SBC growth is relatively modest," Morgan Stanley said, while visibility into Microsoft's OpenAI stake is limited due to equity method accounting.

By contrast, Oracle faces "dilution risk" as rising SBC coincides with high dividends and capex spending.

Morgan Stanley cautioned that elevated SBC and infrastructure investment could "pressure capital returned to shareholders."

While some companies may offset dilution with buybacks, the bank argued that persistent equity issuance without corresponding innovation gains could "erode value."

Still, analysts acknowledged SBC's strategic role in securing scarce AI talent, especially since the release of ChatGPT.

"As SBC becomes a larger portion of overall costs, investors may need to weigh the trade-off between talent acquisition and potential shareholder dilution," Morgan Stanley said.

The bank concluded that investor scrutiny of AI spending should broaden beyond capital expenditure to include SBC as well.

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