Falling stock prices put pressure on Amazon and Roku’s compensation strategies
- Tech companies have massively increased the number of RSUs granted to workers, according to an Insider study.
- The slump in tech stocks has made it harder to maintain employee compensation through stock awards.
- A compensation consultant called RSU’s issuance boom “completely unsustainable”.
A pandemic-fueled hiring spree, followed by a dramatic stock market crash, is putting pressure on the compensation strategies of public tech companies like Roku, Uber, Pinterest and even Amazon.
Engineers and other workers have been wooed in recent years with generous shares of capital, called restricted stock units, or RSUs. Rewards are often valued based on the market price on the day they are granted.
It worked great when tech stocks were going up. But now that the sector has collapsed, many companies are being forced to issue millions more shares just to keep employee stock compensation at the same level as in previous years. This dilutes shareholders and makes some investors upset enough to speak out publicly.
Amazon is the most publicized example. In the second quarter, the internet giant is poised to spend a record $6 billion on stock-based compensation, up 66% from the same period last year. In the first quarter of this year, the company awarded 1.4 million PSUs, more than double in the same period of 2021, according to an Insider analysis of regulatory filings.
“Instead of rationalizing costs to prepare for a tougher outlook, management teams are simply issuing more shares to employees at depressed prices to compensate for the fact that their poor execution has led to a decline in the stock price. action,” said Dan Sundheim, a hedge fund manager, wrote this month, after disappointing results from Amazon, the stock plummeted. “Shareholders shouldn’t bear the cost with more dilution.”
Small tech companies face even greater challenges. With a lower market value and fewer stocks to play with, they still have to compete with larger rivals for the same expensive talent. And each increase in the number of RSUs can dilute investors even more.
In Q1 2021, Twitter granted 3.26 million RSUs. During the same period this year, it granted 35.85 million RSUs, or about ten times more. Other companies, including Snap, Pinterest, Wayfair, Uber and DoorDash, have doubled or even tripled the number of RSUs granted in the same time frame.
“It’s completely unsustainable,” said Aalap Shah, chief executive of Pearl Meyer, which advises companies on compensation plans. “It really affects some of the smaller companies, but even some of the bigger ones, because there always seems to be someone bigger or willing to go further.”
the Roku brand granted 97,000 RSU in the first quarter of 2021 at an average price of $384.11 per share. During the same period this year, it granted 3.8 million. This is an increase of 3,813%. One of the reasons was a drop in its share price. The average price of these new RSUs was $140.48 in the first quarter of 2022.
A person familiar with Roku’s compensation strategy said the company pays to attract and retain top talent. The person added that Roku’s stock-based compensation as a percentage of revenue was among the lowest in the industry.
Facebook and Google “use their size and scale as a weapon”
Industry behemoths have a distinct advantage here, especially those with rich market values, large shareholder bases and ample cash reserves. When companies like Google and Microsoft issue millions of new shares, those moves represent a relative drop in the ocean. And if employees are really upset about their companies’ falling stock prices, these giants can tap into billions of dollars in cash to pay workers more directly.
Neil Campling, head of technology, media and telecommunications research at Mirabaud Securities, said big companies like Facebook and Google “use their size and scale as a weapon – to retain talent rather than lose it. with many recent hires underwater on their stock-based compensation plans.”
Facebook, already generous in RSU, rose from 41 million in the first quarter of 2021 to 66 million a year later, an increase of 62%. Google went from granting 6.6 million to 8.3 million, a 24% increase, just ahead of Microsoft, according to Insider’s analysis of regulatory filings.
“How smaller-cap competitors can compete or retain talent could become a significant issue in the coming year in these choppy markets,” Campling said.
RSUs and cash for salaries are ‘limited resources’
Shares of Shopify have lost around 80% of their value since mid-November, forcing Amazon’s rival to change the way it pays workers. Under the new plan, employees will receive a raise, along with the ability to determine how much of their total compensation is in cash and how much is in stock.
In addition to granting more shares, companies do so more frequently, according to Pearl Meyer’s Shah, and grant it to more people within the organization. While you wouldn’t normally expect a small business to offer an annual “renewal” grant — an additional RSU grant after a year of work — it now does. Where lower-level non-technical employees did not expect to receive RSUs, they now do.
“They’re hoping they’ll grow on rising costs, and that’s not necessarily the case,” Shah said. “We’re heading for a contraction or a bust of that.”
RSUs and money for salaries are “limited resources”, Shah said, even though companies grant shares in what appear to be unlimited amounts. He said he expected a series of “layoffs and adjustments” at companies of all sizes.
“Whenever you ask for the most cake possible, what will happen?” Shah said. “You have a stomach ache afterwards.”
Are you a Facebook, Twitter or Snap employee with information to share? Do you have any advice? Contact Kali Hays at [email protected], via the Signal secure messaging app at 949-280-0267 or Twitter DM at @hayskali. Reach out using a non-professional device.