ESG Telegraph
  • Home
  • Latest News
  • Environment
  • Companies
  • Investors
  • Governance
  • Markets
  • Social
  • Regulators
  • Sustainable Finance
Featured Posts
    • Companies
    Ted Baker recommends cut-price takeover offer from Authentic Brands
    • August 16, 2022
    • Companies
    Container shipping’s tonnage tax trick
    • August 16, 2022
    • Latest News
    German recession fears deepen as economy is hit by ‘perfect storm’
    • August 16, 2022
    • Companies
    Gaming’s loot box — the slippery slope of paying for rewards
    • August 16, 2022
    • Latest News
    Liberals must overcome their aversion to conflict
    • August 16, 2022
Featured Categories
Belarussia
View Posts
Companies
View Posts
Energy
View Posts
Environment
View Posts
Food
View Posts
Governance
View Posts
Health
View Posts
Investors
View Posts
Latest News
View Posts
Markets
View Posts
Potash
View Posts
Regulators
View Posts
Russsia
View Posts
Social
View Posts
Supply Chain
View Posts
Sustainable Finance
View Posts
Technology
View Posts
Uncategorized
View Posts
ESG Telegraph ESG Telegraph
7K
9K
4K
1K
ESG Telegraph ESG Telegraph
  • Home
  • Latest News
  • Environment
  • Companies
  • Investors
  • Governance
  • Markets
  • Social
  • Regulators
  • Sustainable Finance
  • Markets

The hidden leverage of stock-based compensation

  • February 10, 2022
  • Staff
Total
0
Shares
0
0
0

It’s no secret that one of the perks of working at one of Silicon Valley’s hottest companies is that you get paid in stock.

Popularised in the 1980s as a lottery ticket-type mechanism for cash poor start-ups to be able to induce high-paid white-collar workers to their businesses, the practice is now widely adapted by nearly every listed company, tech or not.

In theory, it’s a win-win. The employee gets a slice of the wealth created by the firm, incentivising them to perform to their best, while the company doesn’t have to spend as much cash on compensation, freeing up more resources for investments and other expenses.

If all goes to plan, a flywheel develops. A rocketing stock attracts top talent looking for riches, which makes the firm perform even better, which makes the stock go up, which means it can attract yet more talent. To boot, if the stock is rising faster than a company’s compensation expense, it can use an increasingly smaller number of shares to pay its workers, reducing dilution.

In a way, stock compensation is not that dissimilar to debt in its ability to supercharge a company’s performance. Unlike debt and the ensuing interest payments, however, the key metric — the stock price — is largely out of management’s control.

And that’s a problem when a stock’s price suddenly goes into reverse.

Since November, we’ve been in the midst of an aggressive sell-off in any company deemed tech. And, whether it be in payments, software or fake meat, nearly all of these businesses aggressively use stock compensation to pay their employees.

Here’s a few examples. In 2021, PayPal dished out $1.4bn in stock to its employees, around a fifth of its operating cash flow. Its stock is down 55 per cent over the past six months. Likewise $36bn communication software specialist Twilio, whose shares are down 45 per cent over the same period, paid $632mn in stock to its workers in 2021 — around three quarters of its revenue. The same goes for Snap. Its shares, despite last week’s bounce, have halved since August. The $65bn social media app dished out $1.1bn in stock-based compensation in 2021, more than three times the $293mn it made in operating cash flow.

Yet we’re ignoring the big daddy of tech sell-offs: Meta Platforms, or the artist formerly known as Facebook.

A week ago, following shambolic fourth-quarter results, Meta’s shares crashed 25 per cent, erasing some $225bn of market cap in the largest one day equity loss in history. It has now shed a third of its value since the summer.

It’s fair to speculate its employees might be upset.

In 2021, Meta paid out $9.2bn in stock-based compensation to its workers in the form of restricted stock units (RSUs), according to its latest 10-K filing.

The RSUs work like this: the shares are set at a certain price — say $300 — which then, generally, are paid out to the employee over a four-year period. (Usually 25 per cent of the total per year although it can be backloaded to incentivise employees to stay.)

In such a scheme, the employee will hope the shares at least hold their value so they’ve not lost money by the time they get their hands on them.

But here’s the wrinkle: Meta’s shares now sit at $232 pre-market while the weighted-average price of all the unvested shares granted to all of its employees at 2021’s end is $244.

From the 10-K:

In short: many of Meta’s employees are now facing paper losses in their pay packages. And what’s more, a lot of them can’t sell.

It gets even worse when you look at 2021 in isolation, as the price of the stock granted to employees on a weighted-average basis was $305 — some 32 per cent above where the current share price is.

Meta’s shares might bounce back. But right now there’ll be hundreds of thousands of tech companies with unhappy employees nursing losses. It is worth thinking about what that might mean for these businesses, and their shareholders, down the line. Particularly, if like Cisco or Microsoft following the dotcom crash, the shares take years to recover.

The obvious one is retaining and attracting talent. Either the company has to offer an employee more stock for the same (or likely, higher) nominal value in their remuneration package, leading to further dilution and lower returns for shareholders, or pay higher base salaries, denting the balance sheet. Neither is a good option.

That’s assuming, of course, that talent wants to join a company whose stock has crashed in the first place.

In such a situation, the stock-comp flywheel could easily unwind: top employees leave for brighter shores, draining the talent pool, creating a drag on company performance, leading to a lower stock price and . . . down the drain we go.

Tech companies aren’t the only ones levered to their stock prices, either. For employees, there’s also the small issue of personal income taxes.

Say you have $1,000 of stock that vests. You choose to hold onto it, after all, you want to show some loyalty. Now imagine that stock halves in six months. You have $500 of stock, but taxes to be paid on the price it was granted to you at: $1,000. Ouch.

It’s happened before. Back in 2001 the LA Times ran an article about several Silicon Valley employees who, thanks to the spectacular burst of the dotcom bubble, were facing higher taxes than their post-crash net worth:

Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill.

“I’ve lost sleep. I can’t eat. I cannot pay and we’re ruined,” Chou said.

What’s that phrase about history, repeating, and rhyming again?

Total
0
Shares
Share 0
Tweet 0
Pin it 0
You May Also Like
Read More
  • Markets

Sovereign debt architecture is messy and here to stay

  • Staff
  • August 16, 2022
Read More
  • Markets

Gas markets leap on both sides of Atlantic as traders search for supplies

  • Staff
  • August 16, 2022
Read More
  • Markets

Alex Mashinsky took control of Celsius trading strategy months before bankruptcy

  • Staff
  • August 16, 2022
Read More
  • Markets

Coming soon: A Sceptic’s Guide to Crypto

  • Staff
  • August 16, 2022
Read More
  • Markets

A sceptic’s guide to crypto: boom and bust

  • Staff
  • August 16, 2022
Read More
  • Markets

Pound still suffers from the UK’s weak economic outlook

  • Staff
  • August 16, 2022
Read More
  • Markets

US junk bond market in powerful rebound on easing inflation worries

  • Staff
  • August 16, 2022
Read More
  • Markets

Liz Truss’s inflation mandate | Financial Times

  • Staff
  • August 16, 2022

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Featured Posts
  • 1
    Ted Baker recommends cut-price takeover offer from Authentic Brands
    • August 16, 2022
  • 2
    Container shipping’s tonnage tax trick
    • August 16, 2022
  • 3
    German recession fears deepen as economy is hit by ‘perfect storm’
    • August 16, 2022
  • 4
    Gaming’s loot box — the slippery slope of paying for rewards
    • August 16, 2022
  • 5
    Liberals must overcome their aversion to conflict
    • August 16, 2022
Recent Posts
  • AstraZeneca sues former executive over move to rival GSK
    • August 16, 2022
  • Sovereign debt architecture is messy and here to stay
    • August 16, 2022
  • Harvard to offer free MBA tuition to lowest-income students
    • August 16, 2022

Sign Up for Our Newsletters

Subscribe now to our newsletter

ESG Telegraph
  • Home
  • Privacy Policy
  • Guest Post
  • Contact

Input your search keywords and press Enter.