Tech Companies Face Greater Scrutiny for Paying Workers with Stock | Hacker News Reader

Tech Companies Face Greater Scrutiny for Paying Workers with Stock

nytimes.com

58 pointsnikcub64 comments

Hopefully they face greater scrutiny from employees as well. It's annoying to be compensated in stock. I don't want to deal with complex wash sale chains just so I can dump my shares as soon as they vest. Just give me cash and let me choose if I want to buy shares in the market like anyone else. If they must give me golden handcuffs then do so in the form of cash bonuses at set dates.

I know employees who negotiated for higher salaries in lieu of stock options. Years later, they were awfully unhappy when their peers made bank off of the stock.

So few people make bank from tech stock that everyone should literally ignore this anecdote and operate in life as if it is not true. This is like saying you're not going to buy that $2.00 lottery ticket, then being mad when someone else wins the lottery. Do not buy the $2.00 lottery ticket.

Then I read complaints about how the owners (shareholders) of the company are making pots of money and the employees aren't, and how brutally unfair that is.

BTW, 20 years ago I read a statistic that Microsoft had made 10,000 millionaires just in the Seattle area alone. In the early 90s, an acquaintance would refer to his car as his "quarter million dollar Oldsmobile". I finally asked him what he meant. He laughed, and said that he'd cashed in his MSFT stock options to buy it, and that was what the options would have been worth when I asked him.

> Then I read complaints about how the owners (shareholders) of the company are making pots of money and the employees aren't, and how brutally unfair that is.

The employees should be receiving dividend-like cash bonuses and should be receiving salaries that actually afford the cost of living in their geographic location (in addition to legitimate retirement contributions, 40-hour work weeks, generous vacation, and legitimate insurance benefits, which all should simply be regarded as the absolute bare minimum conditions of employment period).

Saying it's either stock or no stock is a false dilemma. The same amount of compensation should be shared with the employees, just not necessarily in stock format.

I'm also not opposed to someone who chooses to take company stock instead of an equivalent cash bonus. If you weigh up those risks, you're a grown up and can choose for yourself.

But for most people, taking a cash bonus and putting it into a simple low-fee index fund or ETF is going to be worth a ton more than their company stock, while also lowering their overall risk, since a market downturn won't affect their regular paycheck and since their regular employer won't affect their return to their outside investments.

The point is they should have the choice.

> BTW, 20 years ago I read a statistic that Microsoft had made 10,000 millionaires just in the Seattle area alone.

BTW I read that someone somewhere won the lottery ... better go buy a ticket.

I agree it's a false dilemma. I like supporting alternatives by citing examples in low-margin industries. Publix keeps coming to mind as they've been giving employees paychecks + stock bonuses since the beginning:

http://www.forbes.com/forbes/welcome/

Founding family got rich, too. Costco always did good pay and benefits with what HN would call a subscription model. Plenty companies referenced here have a subscription model.

The thing is that employee stock options really can be a bad deal. Sure, you can point to plenty of people that have gotten rich off of them but that doesn't change the fact that so much that can go wrong. If you're trading a salary for them that you could be saving and investing today you should be aware of the risks, sadly it doesn't feel like a lot of people in the industry really are.

- Company fail? Oops, not worth anything - Company succeeded but sold for under whatever the last round was raised at? Oops, not worth anything - it all goes to the preferred stock holders - Raised a huge round at a great valuation? Too bad, you can't take any money off of the table like the founders probably can. Also, any options you now exercise are 'worth' more and oops, you just triggered AMT and now owe a bunch of taxes for income that may or may not ever exist and that you most certainly can't access yet - Company went public and the stock shot up? Great... unless it tanks before your 6 month lock up period is up and you're stuck with a tax burden you can't afford to pay

Layered on top of this is the fact that a lot of the decisions that have real, tangible effects on the above are totally out of your hands (things like how much dilution your company takes on). Even if your founders go to bat for you the investors have very different incentives than you do in all but the totally ideal outcome.

My point isn't that people should avoid accepting options but that they should be viewed as a nice perk along the lines of someone buying you a big stack of lottery tickets. I've had too many friends comparing offers between companies multiply what percentage of the company they'd be getting (if the company is even telling them this) by the company's current valuation and treating that like it's money in the bank.

By all means, trade salary for the opportunities that working at a small startup could give you (like responsibility, an opportunity to learn, coworkers you like/respect, etc...) but be _very_ aware that what the company tries to sell you RE stock is a reality viewed through the rosiest of glasses.

Oh, I know the downside. I've had plenty of stock options in various companies over the years that panned out to sand. None of them paid off. But I'd still do it again.

Yeah, the thing to remember IMO is that within the company, you have access to privileged information and [typically] better deals on equity if you choose to take it. Given the choice between that or taking the cash and putting it into mutual funds or something, it seems like a much better gamble to try your luck. I think of it as a lottery ticket with great odds, and I don't invest more than I'm willing to lose :)

Whoever stays years at a company is already getting screwed.

The stock options ideally align employees with the goals of the business. Anyone who believes in the company they work for should desire options over cash.

Not if you want to diversify. If your job is the source of your cash income and is also the primary source of equity, that's a problem, because if the employer has a downturn, you lose twice.

It's generally bad if your cash income is highly correlated to your equity value. Claiming that stock compensation aligns employees with the company is just nonsense. You want to hire smart people, right? Well, smart people will want their income diversified.

In the specific case of RSU's, there is another advantage to the company: In the event of a downturn (where revenues and stock price are correlated, which they usually are), the company automatically cuts everyone's salary. Krugman is a big fan of talking about the influence of the Zero Lower Bound on nominal wages and price deflation. Giving employee's a large fraction of their salary in stock offsets those difficulties somewhat. If the tech bubble bursts, the large companies may not have to lay off as much labor to stay afloat, since their per-unit costs will automatically go down.

Edit: The article touched on this briefly, noting the disadvantage to the employees in the case that their particular firm does poorly while other companies in the market are doing OK. I'm specifically talking about industry-wide downturns. The ability to cut everyone's salary this way may keep unemployment from soaring as high as it would otherwise.

If the cash portions of salaries are being paid out of revenues (company is profitable), why does the stock price matter?

Downward nominal wage rigidity can be rephrased as: Nobody likes to get a pay cut. (Base) pay cuts piss employees off. When revenues fall, the stock price will fall, and automatically reduce employee salary as a result. But since the human perception of stock compensation is more like "gravy" than "essential to my way of life", I don't think that a stock price drop is as perceived to be as bad as a nominal pay cut, even though real employee pay is cut in either case.

Not sure if this is what you mean, but a big disadvantage is that stocks vest over (usually 4) years. Every year the company can choose to give you more, or not. If not they are cutting your salary.

> If not they are cutting your salary.

Maybe, maybe not. If the stock price is beating inflation, then you're still getting a raise here, too. Failing to renew your stock compensation at the end of the four-year period would be a pay cut.

What's the best way to eliminate the market risk you get when you're issued RSUs? Short selling? Put options?

Companies may explicitly bar these.

Puts work well if you can acquire the options at a reasonable price (they're often quite expensive though).

Mark Cuban did this when Broadcast.com was acquired by Yahoo!

However, the contracts may be illiquid / not available for smaller market cap companies.

I could be wrong, but I think most companies prohibit their employees from short exposure (shorting equity, being long equity puts, or short equity calls) to the company, even if they're still net long the company.

I may not be understanding your question but I generally have advised my wife to sell most of them as they vest. Having all of your compensation in one company (salary as well as thousands of dollars in stock) is too undiversified in my opinion. They are also much less liquid then you'd think as there are often long blackout periods with short windows to sell so it's quite tough to time the market.

At the end of the day its up to the employees to realize what they are getting into.

Typically for a tech employee when it comes to compensation the equation is salary + bonus + RSU/options. Its important when considering a position to think through each piece.

In regards to the bonus how does it get determined what the amount is, is it known upfront, does it typically get paid out at 100%, over 100%? What is the percentage amount for the last x years?

For the RSUs/Options if its an established company how stable is it, if its a startup then how likely is the success of the company (in my case if its a startup then I personally don't depend on this part of compensation).

Only publicly traded tech companies give that.

For the others (especially growth startups that aspire to exit) it is just salary + pitiful options.

There isn't anywhere near parity to make up for the lack of comparable bonus or liquidity of RSUs.

Well from my personal experience at startups quite a few of them do give bonuses. Its a way for them to have control over whether you get part of your compensation. Often based on performance (for the reputable ones) but sometimes just based on whether they feel like paying it!

The bonus isn't anywhere near what the larger tech companies do. I get it, they are cash strapped, my perspective is that they should go back to the VCs and double the size of their investment rounds to accommodate bonuses that are nearer to upwards of 50%-100% of the base salary. And the boards (which also include the VCs) shouldn't be balking at the idea of having employee equity pools greater than 5%.

They are acting like they are doing you a favor, but the current reality is based on greed (from the board) and it will simply take a collective of engineers to simultaneously realize they are undervalued, just like some financial professionals realized in the 80s.

There are alot "oh its wallstreet" comments here, but I'm not sure its warranted in this case.

Investors in this case are pension funds, hedge funds and in some cases ETF managers like BlackRock and Vanguard who are speaking up.

I can see how some tech employee's who get part of their compensation in the form of restricted shares or stock options may look at this as wall street attacking them, but in all honesty, run of hte mill employee stock rewards pale in comparison to C level executive compensation.

This is targeted squarely at the Marissa Mayer's of the world not the average Google employee.

This is a long running controversy. Below is a Harvard business review article from 2003 about the issue. I remember that at one point it was a contentious issue as to whether or not companies had to account for stock option/stock grants in their GAAP counting.

https://hbr.org/2003/03/for-the-last-time-stock-options-are-...

> This is targeted squarely at the Marissa Mayer's of the world not the average Google employee.

You miss the point of my "Oh, it's Wall Street scrutiny..." comment. If it were government scrutiny, we might see changes in how the current value of the stock of a company that's not publicly traded is reported to its employees.

At the "startup" I used to work for, I got stonewalled every time I asked for the valuation (whether current or near-to-medium-term expected) of the stock options I had been offered. Friends at other startups report similar stories.

Requiring companies to keep up-to-date information about current and expected future stock valuation, shares issued, & etc would be nice. Requiring companies to disclose that information on demand to current or potential future employees (along with where in the queue the shares that one is either being offered or are currently holding are) would be another nice step.

I get that keeping this information up to date might be a hassle. On the other hand, just how the fuck do you raise money without this information? :)

> At the "startup" I used to work for, I got stonewalled every time I asked for the valuation (whether current or near-to-medium-term expected) of the stock options I had been offered. Friends at other startups report similar stories.

OMG same here! Shit like this had me considering if any engineers would bite in joining a union-like entity.

But life is all around still too decent for that.

You can't have it both ways people - when a company strikes it rich people complain that the regular employees didn't get a big enough piece o the pie. When companies do poorly, people complain that the employees totally got screwed because their equity is worth nothing now.

You either can get paid in pure salary and have a lower ceiling (because you're paying for less risk) and then be left out when the company does well. Or you can get some stock with a higher ceiling/lower floor and be screwed if the company goes down the drain. Either way you're not forced to take equity... developers are in demand.

This is before even considering about trying to align interests of the employee with the company..

That's not an example of trying to have it both ways. There's no law that says you can't have both a solid base salary and a good equity grant, so you increase the upside but get screwed less on the downside.

I don't see people on HN often arguing that companies shouldn't be allowed to offer equity, more that people shouldn't blindly accept equity grants they don't understand - that are smaller and more limited in upside than they think - in exchange for greatly below-market salaries.

People complain because the way things work now you take less than market value and when the company has a successful exit years later you end up with... maybe enough to make up for the lesser salary you took. So why not just go work for an established company and make your money without any of the risk.

Perhaps one can't have their cake and eat it too, but it's not uncommon for companies to argue for a much, much higher value on the equity parceled out to employees than that a VC working with better information would.

Or you can take less salary, buy your shares when you leave because strike price is 1/3rd of fair market value and they are going to have an IPO 'any minute now' Then you can wait 5 years until they are bought by Time, Inc. Then you can get a polite letter explaining that you get nothing because only the senior stock shares were in the money.

I'm glad there will be more scrutiny. Currently seems like 'heads I win, tails you lose'.

In the case of the big publicly traded companies, I have been assuming that this was simply a way to securitize the large overseas cash holdings in these companies. If the stock market values the overseas cash holdings as though they were local reserves, then the companies can effectively pay some of their biggest expenses (local employees' salary) with the investor's collective belief in the overseas money.

A strictly rational market might price the book value of that cash at its face value, less the tax burden of moving it to where it would be used. But I don't think they are being rational overall: The potential future tax liability is not counted as a liability, and the company's management is also being given a multiplier as a reward for keeping all that cash (ex, trusting Alphabet/Facebook/Apple as investment firms of sorts, expecting returns greater than the investor's next best alternative). That's really weird to me, since I would expect that to count as a discount against the company for holding onto it as opposed to paying some of it back to the investors through dividends.

The net effect is that means that it costs the company somewhat less to pay its people in stock than in cash.

It's better to withhold remitting profits to the United States if they are used to pay for expenses which would have otherwise used after-tax dollars from the U.S. This also incentivises the offshoring of production, since a dollar overseas is now "cheaper," on a tax-adjusted basis, than a dollar domestically.

> While the median number of restricted shares granted at Standard & Poor’s 1500 companies to executives and employees in 2014 equaled 450,198 shares, tech companies granted a median 798,000 shares of restricted stock to workers, according to data from Equilar, a research firm that provides data on executives, boards and compensation.

It doesn't appear that the author understands how this works...

I agree, the number of shares is of less consequence than the total value as the price of each companies shares varies wildly. If they all got the same number of shares, I would choose to work at Google with a $790 share price rather than LinkedIn with a $40 share price.

I think it's a case of the outstanding share numbers being much easier to get than how much these companies are actually worth right now. I can see an overworked journalist who out of expediency decides to include these meaningless numbers, because including ANY numbers gives the verisimilitude of hard science.

Even if they've done the equivalent of adding a days temperature in F to its wind speed in km/h to its percentage chance of rainfall.

I think this article boils down to two statements,

"Mr. Mahaney said stock-based compensation could “distort the quality” of a company’s earnings and “make them look stronger than they are.” -- this has been a refrain from analysts for years, and the whole reason companies now report options as an expense. The argument goes, if it doesn't "cost" anything to give someone an option, then for a salary budget of X and a revenue of Y you mis-report the cost of revenue so the revenue "looks better" than it really is. In my experience, anyone who has worked at a job where part of their compensation was stock options has never considered options "pay" like the dollars that show up in your paycheck twice a week. They are always lottery tickets, and given the trading restrictions at public companies, usually a pain to exercise or cash out. Further distancing them in one's mind from the notion of compensation. The second statement is this one;

"Ms. Hindlian says that while it can be reasonable for companies to pay workers a lot in stock, the practice can become scary when the stock starts to fall. “Particularly with software companies, you run the risk of losing your leading salespeople, engineers and developers when the stock falls, because employees feel like they’re getting a pay cut,” -- For the folks that I know, they don't consider it pay so if the options which they haven't exercised are underwater they don't consider them a "pay cut."

It is closer to the truth to say that options with value (so called "in the money") do have a retention power on employees but only if they continue to be worth something. And sometimes even that isn't enough.

But it is true to say that employees with options don't behave like little autonomous drone actors moving in collective self interest, and that makes it a lot harder to evaluate the enterprise value of a company. That difficulty arises from the understanding that it is the people that make the company what it is, and not being able to predict if those people will stay or leave adds uncertainty.

The desire for mathematical evaluation is strong in the analyst community and they continue to argue against anything that seems to affect that.

The vast majority of people making money from stock compensation are at big companies that give generous RSU grants, so I'm not really sure how much of what you say is applicable.

I think people absolutely consider RSUs as a factor in compensation, albeit a slightly more complicated, less predictable amount of pay. But given that it can be over 100% of your total cash compensation... it seems crazy to say people don't 'count' it.

This is nonsense. Remember that they're talking about public companies here, and the stock grants aren't options but typically come in the form of restricted stock units.

Of course people treat RSU grants as pay. It's taxed like pay and otherwise acts exactly like pay except that it's tied to the stock price. For many people it's the majority of the pay or an otherwise substantial component of the compensation structure.

If we're talking RSU's sure, if we're talking ISO's not so much.

I would certainly agree with you on the RSU front, although there is the other twist that some companies, like Google, don't equate RSU's 1:1 with actual shares, they can go up or down depending on other factors. So you can have 100 RSU's that convert to 1 share or 200 shares depending on how much your manager likes you. In that case it really doesn't matter if the stock price goes up or down.

Wat? An RSU grant of 100 shares won't actually result ownership of 100 shares?

Not at Google, in California. When I was working there, one of the things they really liked was a dynamic compensation system. Basically everyone got a calibration score and that score dynamically adjusted your compensation, up or down.

To be fair it is a very creative way to avoiding the trap of over paying people. The bottom line is that all grants are legal contracts, generally very long and dense legal contracts, and it is useful to spend time to understand them. California is an "at will" state, if either you or the employer doesn't like the situation, either one of you can end it and be done.

I'm not sure what you are saying corresponds with reality..

"For the folks that I know, they don't consider it pay so if the options which they haven't exercised are underwater they don't consider them a "pay cut.""

Umm, if I had options that were in the money, that suddenly ceased to be, I absolutely would consider that a pay cut.

That's not a pay cut -- it's a loss. You already had those options. When the compensation you receive going forward falls, that's a pay cut.

Doesn't matter. It's still going to feel like a pay cut, and be treated as such by most people.

I wonder what they'd say if said tech companies opted to increase salaries in lieu of stock based compensation. After all, they complain at Costco for compensating their workers too well and giving them benefits that are too good.

Then you look at Wall Street and realize that the companies have some of the highest worker compensation expense ratios around (though I think this is a model to emulate for tech companies rather than shun. Say what you will about WS, but despite their outsized pay for directors at the top, they do compensate the average worker better than other industries)

Wall Street is wrong about this. Tech employees are still undervalued.

Feel free to bid the share price downwards. That would be a good thing.

Regarding the conflict of interest for management to do things that get the share price up... what? How hard are we going to manufacture controversy here? If there is a real optimization then reveal it.

Oh. It's Wall Street "scrutiny", rather than federal, state, or local government scrutiny.

"Investors are concerned with stock option grants".

reads more to me as "investors are reluctant to pay market rates for engineers, but worried about losing control through dilution - want to find an easy answer that doesn't cost them either"

free lunches and dinners!

A $30 value -yours free- if you act now! Our recruiters are standing by!

The econony is slowing, so this shouldn't be a surprise.

Damn those companies, trying to pay their workers with stock instead of giving it to Wall Street.

But they don't "give it" to Wall Street, people actually pay for it, which is the big difference. All the use of the non-GAAP numbers is an attempt to skirt around this fact

And compared to the UK tax treatment of stock options for employees is brutal

What if the way the UK treats stock options for tax purposes is the right way and the US is extremely lenient?

I have no knowledge of what the differences might be. But I read the sentence you're responding to as the opposite of how you seem to.

> compared to the UK[,] tax treatment of stock options for employees is brutal

To me that sounds like the US is strict and England is lenient. Your way would need wording like "compared to the UK tax treatment of stock options for employees[, which] is brutal".

Well for one you cant get a massive tax bill for options that are worth nothing.

The first $15k of capital gains is tax free and approved share schemas have even better allowances.

I know some one working in a 100 year old ftse 100 company that grossed nearly $200k from a share option scheme - and that is effectively tax free.

From next year you can put away $28k in a tax free account that is immune from income tax - this years allowance is $20k.

Thats before you get into EIS and VCT Shares

Actually, yes. Damn them. They should be paying workers with money, instead of lottery tickets that will likely be worthless or diluted to worthlessness by the time it's vested. (Doesn't apply, I suppose, to already publicly traded companies).

Yeah - the entire article is about publicly traded companies.

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