Large technology companies, including zillow group and Amazon, are raising stock compensation to reduce attrition.
There are a number of factors that have prompted employers to increase the number of shares offered to skilled workers, including the ongoing battle for talent, large resignations and the volatile stock market.
Recent changes in the pay structure may benefit start-ups.
Julie Sandler, co-founder and managing director of Pioneer Square labs, said that even if large companies increase stock awards in the name of retaining employees, the total compensation provided to employees “no longer makes them breathless”.
Nathaniel Donohue, co-founder of consolio, a wealth management company that mainly works with scientific and technological workers, said that scientific and technological workers are seeing their stock compensation shrink significantly in the short term due to the economic downturn.
“This creates a huge reservation problem,” he said.
The company chose to issue additional shares to employees to offset these losses. Zillow announced a new equity plan at the earnings call earlier this month to “raise the salary” to support employees with a gap between the planned salary and the actual salary. In the next few years, it will start issuing additional restricted shares to employees, causing the company to lose $180 million to $190 million, with a dilution rate of 2%.
Rich Barton, chief executive officer of zillow, said in the earnings conference call: “in fact, it is more costly to recruit and replace valuable employees tomorrow than to retain employees today.”. “Attrition and attrition are potential obstacles to growth.”
Restricted stock units, the so-called RSUs, are a form of stock based compensation granted by employers to their employees. These shares are granted within a vesting period, which describes the period of time before the employee obtains the shares from the company. This is different from stock options, which require employees to buy back shares from the company. Historically, many companies have used RSU as a way to retain employees, often known as “golden handcuffs”.
According to a report of information, Amazon distributed 138 million restricted shares to its employees in the second quarter ended June 30. Amazon has raised its maximum salary to $350000 from $160000 in February. According to the report, the number of shares issued for employees increased by 82% compared with the same period last year.
But issuing more shares may not be enough to retain employees who are weighing the benefits of joining high growth start-ups.
According to Bloomberg, when employees receive stock to supplement cash wages, they find that when the company’s stock price plummets, their income is much less.
“Startups are taking advantage of this moment,” Sandler said. “When the salary story is not so rich, these talented people will be more open and more active in pursuing their entrepreneurial dream of greater risk and vitality.”
Sean Sternbach, co-founder of cloud capital, said that the compensation plans of early companies had become more flexible. Cloud capital is a new wealth management company for technology founders and employees.
He added that many start-ups that are still in the seed stage, round a or round B investment stage can provide new employees with the option to decide whether they want more equity or more cash compensation.
Large tech companies often fail to achieve this level of flexibility, which gives startups an advantage in recruiting employees. Sternbach said that this has always been the case, but he now sees the situation getting more and more serious.
Many start-ups will provide a large number of shares as a basis for compensation to maximize the cash balance on their balance sheets – especially in the case of economic uncertainty, they want to save cash. In the event of a liquidation event, such as an initial public offering or acquisition, these shares can be sold by skilled workers to obtain substantial returns.
CNBC also reported that in some companies, the evidence of the eventual monetization of stock options is more important than the stock itself. For example, it is reported that when datarobot, an artificial intelligence software startup, remained private, it caused more than 1200 employees to have no chance to cash their shares, which led to internal unrest.
Sandler said that she was currently advising start-ups in her portfolio, and that when recruiting technology talents, there were two factors at the same time: labor shortage and economic recession.
“By definition, the current recruitment behavior is to persuade people to take personal and professional risks in the name of your mission,” she said. “The compensation package should reflect this.”
Kieran Snyder, chief executive officer of TEXTIO, said in a blog post on stock compensation that another potential benefit of technology workers joining startups is that their work may have a greater real impact on the company’s performance.
“When I worked at Microsoft, I held a very senior position, and I was sure that anything I did would not make a big change in the stock price month by month,” she said. “This is really different for the employees of the startup company. Everything you do in the small environment can change the development trajectory of the company.”
She warned that potential start-up employees may have difficulty estimating the value of their stock awards, and the redemption of these stock options needs to be purchased by the secondary market or the acquirer.
She said that these risks are important for anyone who joins a startup because they may not have been exposed to stock compensation before.
“People who don’t usually have this information are the most unrepresentative people in startups,” she said. “Thus, real systemic inequality will persist.”
Unlike listed technology companies like zillow, zillow already has a market to liquidate its shares.
At Zillo’s earnings conference call, Barton called the company’s new equity plan “a wise business decision”
“It recognizes the importance of retaining talent and aligning their compensation with the long-term interests of shareholders,” he said. “I hope you will agree and understand our decision.”
Editor’s note: This article is updated to clarify the difference between stock options and restricted stock units.