Big tech companies like Zillow Group and Amazon are raising the dial on stock compensation to reduce churn.
There are many factors that motivate employers to increase the amount of stock they provide to tech workers, including the ongoing talent war, mass resignations, and a volatile stock market.
A change in compensation could be a boon for startups.
Even as large companies increase stock compensation in the name of retention, the total package offered to employees “is no longer breathtaking,” said co-founder and managing director of Pioneer Square Labs. Julie Sandler says
Nathaniel Donoghue, co-founder of Consiglio, a wealth management firm that caters primarily to tech workers, said tech workers will see the value of their stock compensation plummet in the short term due to the recession. said he was witnessing
“It creates big retention issues,” he said.
Companies are choosing to grant additional shares to their employees to offset these losses. In its second-quarter earnings call earlier this month, Zillow announced a new equity initiative to “enhance compensation” for employees with gaps between planned and actual compensation. It will begin issuing additional restricted stock units to employees over the next few years, costing him $180 million to $190 million at 2% dilution.
“The truth is, it will cost more to hire and replace valuable employees tomorrow than it does to retain them today,” Zillow CEO Rich Burton said on the earnings call. “Turnover and churn are insidious barriers to growth.”
A Restricted Stock Unit, or so-called RSU, is a type of stock-based compensation that an employer grants to its employees. Often awarded over a vesting period. This represents the period of time before an employee buys stock from the company and makes a profit. Historically, many companies have used her RSUs as a way to retain employees. This is often called the golden handcuffs.
Amazon, which raised its top wage from $160,000 to $350,000 in February, gave employees 138 million shares of restricted stock in the second quarter, which ended June 30, according to a report in The Information. Granted. That’s an 82% increase from the number of employee shares issued in the same period last year, the report said.
But allocating more equity may not be enough to retain employees considering the benefits of joining a high-growth startup.
When employees receive stock to supplement their cash paychecks, they find themselves earning much less when the company’s stock price plummets, Bloomberg reported.
“Startups are taking advantage of this moment,” says Sandler. “When reward stories aren’t overwhelmingly rich, the same talented people tend to be more open-minded, more risky, and chasing crappy startup dreams.”
Early-stage companies are becoming more flexible in their compensation plans, said Sean Sternbach, co-founder of Cloud Capital, a new wealth management firm for technology founders and employees.
Many startups still in seed, series A, or series B investment rounds can offer new hires the option to decide whether they prefer more equity or more cash rewards, he added. .
Large tech companies often can’t match that level of flexibility, which gives startups an edge when hiring employees. , said he is now seeing its scale grow.
Many start-ups offer large amounts of equity as a compensation basis to maximize the cash remaining on their balance sheets, especially if they are trying to save cash in an uncertain economy. In the case of a liquidation event such as an IPO or acquisition, technologists can sell these shares for huge profits.
For some companies, evidence of the ultimate path to monetizing stock options is more important than the stock itself, CNBC reports. For example, when artificial intelligence software startup DataRobot remained private, more than 1,200 employees lost the chance to cash out their shares, causing an internal uproar, The Information reports.
Sandler said he now advises startups in his portfolio that there are two factors going on at the same time when it comes to hiring tech talent.
“By definition, the act of hiring now is persuading people to take personal and professional risks in the name of your mission,” she said. It has to reflect.”
Another potential benefit of tech workers joining a startup is that their work could have a more tangible impact on the company’s performance, says Textio CEO Kieran Snyder I wrote a blog post about rewards.
“When I was at Microsoft, I had a pretty significant role, and I’m pretty sure I didn’t do anything that would change the stock price significantly from month to month,” she said. “For a startup employee, where everything you do in a small environment can change the trajectory of the company, this is very different.”
She said it can be difficult for potential start-up recruits to estimate the value of stock compensation, and to cash in on those stock options, they would need to be purchased by the secondary market or an acquirer. This is unlike public tech companies that already have a market to liquidate their shares.
These risks are important to understand and consider for anyone joining a startup who has never been exposed to stock-based compensation, she says.
“The uninformed people are usually the most underrepresented people in startups ever,” she said.
This is unlike public tech companies such as Zillow, which already have a market to liquidate their shares.
On Zillow’s earnings call, Burton described the company’s new equity initiative as a “smart business decision.”
“We recognize the importance of retaining talent and aligning their compensation with the long-term interests of our shareholders,” he said. “We hope you will agree with and understand our decision.”