- Tech firms have massively increased the number of RSUs granted to workers, an Insider study finds.
- The tech-stock collapse has made it tougher to keep paying staff through equity awards.
- One compensation consultant called the boom in RSU issuance “completely unsustainable.”
A pandemic-fueled hiring frenzy, followed by a dramatic stock-market collapse, is piling pressure on the compensation strategies of public tech companies such as Roku, Uber, Pinterest, and even Amazon.
Engineers and other workers have been wooed in recent years with generous chunks of equity, known as restricted stock units, or RSUs. The awards are often valued based on the market price on the day they’re granted.
That worked great when tech stocks were rising. But now that the sector has slumped, many companies are being forced to issue millions of extra shares just to keep employees’ stock compensation at the same level as in previous years. That’s diluting shareholders and making some investors upset enough to speak out publicly.
Amazon is the highest-profile example of this. In the second quarter, the internet giant is on pace 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 granted 1.4 million RSUs, 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, mgmt teams just issue more stock to employees at depressed prices to compensate for the fact that their poor execution led to a depressed stock price,” Dan Sundheim, a hedge-fund manager, wrote this month after disappointing Amazon results sent the stock into a tailspin. “Shareholders shouldn’t bear the cost of this with more dilution.”
Smaller tech companies face even bigger challenges. With a lower market value and fewer shares to play with, they still have to compete with larger rivals for the same expensive talent. And every increase in the number of RSUs can dilute investors even more.
In the first quarter of 2021, Twitter granted 3.26 million RSUs. During the same period this year, it granted 35.85 million RSUs, a roughly tenfold increase. Other companies, including Snap, Pinterest, Wayfair, Uber, and DoorDash, doubled or even tripled the number of RSUs granted in the same time frame.
“It is completely unsustainable,” said Aalap Shah, a managing director at Pearl Meyer who advises companies on compensation plans. “It’s really affecting some of the smaller companies, but even some of the larger companies because there always seems to be someone larger or willing to go deeper.”
The video-brand Roku granted 97,000 RSUs in the first quarter of 2021 at an average price of $384.11 a share. In the same period this year, it granted 3.8 million. That’s an increase of 3,813%. One reason was a drop in its stock price. The average price of those 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 are ‘using their size and scale as a weapon’
The behemoths of the sector have a distinct advantage here, especially those with rich market values, broad shareholder bases, and ample cash hoards. When companies such as Google and Microsoft issue millions of new shares, those moves represent a relative drop in the ocean. And if employees get really upset with their companies’ falling stock prices, these giants can tap into billions of dollars in cash to pay workers more directly.
Neil Campling, the head of technology, media, and telecom research at Mirabaud Securities, said large companies like Facebook and Google are “using their size and scale as a weapon — to retain talent rather than lose them with many recent hires underwater on their stock-based compensation plans.”
Facebook, already generous with RSUs, went from granting 41 million in the first quarter of 2021 to 66 million a year later, a 62% increase. 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 year ahead in these choppy markets,” Campling said.
RSUs and cash for salaries are ‘finite resources’
Shares of Shopify have lost about 80% of their value since mid-November, forcing the Amazon rival to change how it pays workers. Under the new plan, employees will get a raise, along with the ability to determine how much of their total compensation comes in cash and how much is stock.
In addition to granting more stock, companies are doing it more frequently, according to Shah of Pearl Meyer, and granting it to more people within the organization. While a smaller company would not normally be expected to offer a yearly “refresher” grant — an additional grant of RSUs after a year of work — now they are. While lower-level nontechnical employees didn’t expect to receive RSUs, now they do.
“They’re hoping they’ll grow through the increased costs, and that is not necessarily happening,” Shah said. “We’re headed toward a contraction or bust of this.”
RSUs and cash for salaries are “finite resources,” Shah said, even if companies grant stock in what seems like unlimited amounts. He said he expected a series of “layoffs and adjustments” to come at companies of all sizes.
“Anytime you ask for the most cake you can possibly get, what’s going to happen?” Shah said. “You get a stomachache after.”
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