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Why on earth would employers want to eliminate those massive returns? That's been an amazing tool for employee retention, especially for FAANG. If they reverted

Why on earth would employers want to eliminate those massive returns? That's been an amazing tool for employee retention, especially for FAANG. If they reverted to paying cash plus bonus, they would be less competitive when hiring and retaining people. The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it. Companies whose stock did not tank are retaining their normal compensation programs.

foobarian 4y ago
Should that be FAAG? Wasn't Netflix famously the one big tech co that paid all cash?
- kevdozer1 4y ago
  I just don't think that acronym will catch on
ericmay 4y ago
If they all wink wink do it at the same time then it doesn’t matter.
- twblalock 4y ago
  Yeah but they aren't. And they won't. If there was collusion going on, compensation never would have skyrocketed over the past decade.
  - faangiq 4y ago
    Comp is still 2x less than it should be
  - mrguyorama 4y ago
    There have been multiple times in the past decade that FAANG colluded to decrease wages.
    - twblalock 4y ago
      I can only think of one, and it was an anti-poaching agreement from 2005 that the involved companies paid compensation for later. I haven’t seen any reason to believe that is still happening.
    - marvin 4y ago
      I wonder what kind of collusion Europe is up to, with salaries at 50%-20% of those available in the US.
      - junofan 4y ago
        Productivity is generally lower.
        marvin 4y ago
        2x-5x? Color me skeptical. Depending on what's behind that statement, it could actually be a bit insulting. I've been to US tech conferences; US developers aren't doing anything differently than the Northern European ones. Many times, I've heard discussions of at those conferences of processes that are more broken than the ones I wrestle with. It's a combination of corruption, collusion, widespread inefficiencies that limits high salaries at the margins (meaning that the marginal company available to each employee is never desperate), very high pre-payroll hidden taxation. Also, importantly I think, a lack of competition between multiple globally dominant tech companies with huge profits per employee and a very obvious pathway to monetizing each additional employee's labor. So, complex answer. But I'd stake money that collusion, often silently government-sanctioned, is significantly more common than in the US. An example of this is very common in Norway, where practically all education is state-funded and the number of students for each profession is directly decided by the state. Private-sector interest groups have almost direct control over some of these processes, disguised as a public debate in the newspapers leading up to quota decisions. This leads to an almost planned economy of the availability of professionals.
wikfwikf 4y ago
This is foolish. When public companies give stock to their employees, they dilute the stock as much as if they issued stock and sold it. So the cost of that compensation is the same as if it were in cash. If everyone knows that say, Netflix's stock price is guaranteed to go up 20% a year for the next 5 years, then the market price of that stock would suddenly jump up to the point where it no longer makes excess returns. So the market price of the stock reflects the company's (risk-adjusted) growth potential already. This also applies to non-public companies with any amount of maturity - the marginal investor has a good sense of what the company is worth and does not want to lose out by issuing stock below that. Put these two together and giving employees stock is economically not very different to giving them money and they choosing to invest it in mutual funds. The main difference is that you make your employees' lives slightly harder - with taxation and with the fact that they need to sell stock to get cash for what they want to buy or invest in. The reason that stock options are preferred, especially for private companies, are none of them very good. Firstly employees have an inflated perception of what their company will be worth in the future. They assume that it's going to be AirBnB, not WeWork, not Palantir, and not the failed start-up that you've never heard of. Secondly employees also don't correctly discount uncertainty. Would you rather have the cash to buy your dream home/pay off your mortgage, or take a 10% chance of 10 times that amount of money? To most of us the second option is worth considerably less. Thirdly companies sometimes feel better about giving out pieces of paper that they have an unlimited supply of than giving out their own cash, even though it's a wash financially. And lastly there used to be some tax advantages to firms paying with stock options - those were loopholes which have largely been closed. Making your employees into investors (by giving them stock options) only made economic sense when venture capital money was scarce and expensive. This has not been the case for a long time.
- dcow 4y ago
  Specifically regarding your second paragraph: I think you’re overlooking the market’s ability to value tech stock. If everyone knows Netflix is gonna jump 20% a year for the next 5 years then everyone would dump their entire savings, take the penalty and reinvest their IRAs even, into Netflix. Why doesn’t this happen?
opportune 4y ago
Because during those 2nd, 3rd, 4th years those employees have much larger compensations than they would get on the market, and companies would rather keep the stock if they don’t need to compensate employees that much to retain them. Many of the companies that are doing this are near-IPO or post-IPO trying to make their finances better. With GAAP, IIUC RSUs are recorded as expenses/count against shareholder equity at the vested price. So if you are a company trying to become GAAP profitable, even if you don’t claw back old appreciated grants, you can prevent the problem going forward/appease shareholders concerned about the impact on GAAP profitability by preventing appreciation. A long-dated RSU is a liability that can become expensive. Also personally I think getting highly appreciated RSU comp can introduce incentives like employees staying at a company longer than they should or want to (ie because they are burnt out or disengaged) since it may not be possible to find another job that compensates you nearly as much. And, it creates very large pay gaps - an entry level employee who joined 2 years ago may be making more than a staff level employee hired recently. I think RSUs are amazing for employees and the vesting/expected refresher details are a very important thing I look at when evaluating working somewhere. But many other people probably just look at the Year1 TC which doesn’t include appreciation or refreshers at all. I think enough people are like me that traditional RSUs won’t disappear any time soon, but I expect more companies to try to see what they can get away with in reducing equity comp.
PragmaticPulp 4y ago
> The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it. This is exactly why companies are doing it. If you're compensated in units of stock and the stock price goes down, you are incentivized to switch to another company to restart the whole process. It's a negative feedback loop. Company struggles -> stock price declines -> employees leave -> company struggles more -> repeat. I know employees want the best of both worlds (stock appreciation when it goes up, refreshers when it goes down) but realistically I expect more companies to move toward defined cash payouts now that we're out of the unusual bull market of the past decade.

foobarian 4y ago

Should that be FAAG? Wasn't Netflix famously the one big tech co that paid all cash?

kevdozer1 4y ago
I just don't think that acronym will catch on

ericmay 4y ago

If they all wink wink do it at the same time then it doesn’t matter.

twblalock 4y ago
Yeah but they aren't. And they won't. If there was collusion going on, compensation never would have skyrocketed over the past decade.
- faangiq 4y ago
  Comp is still 2x less than it should be
- mrguyorama 4y ago
  There have been multiple times in the past decade that FAANG colluded to decrease wages.
  - twblalock 4y ago
    I can only think of one, and it was an anti-poaching agreement from 2005 that the involved companies paid compensation for later. I haven’t seen any reason to believe that is still happening.
  - marvin 4y ago
    I wonder what kind of collusion Europe is up to, with salaries at 50%-20% of those available in the US.
    - junofan 4y ago
      Productivity is generally lower.
      - marvin 4y ago
        2x-5x? Color me skeptical. Depending on what's behind that statement, it could actually be a bit insulting. I've been to US tech conferences; US developers aren't doing anything differently than the Northern European ones. Many times, I've heard discussions of at those conferences of processes that are more broken than the ones I wrestle with. It's a combination of corruption, collusion, widespread inefficiencies that limits high salaries at the margins (meaning that the marginal company available to each employee is never desperate), very high pre-payroll hidden taxation. Also, importantly I think, a lack of competition between multiple globally dominant tech companies with huge profits per employee and a very obvious pathway to monetizing each additional employee's labor. So, complex answer. But I'd stake money that collusion, often silently government-sanctioned, is significantly more common than in the US. An example of this is very common in Norway, where practically all education is state-funded and the number of students for each profession is directly decided by the state. Private-sector interest groups have almost direct control over some of these processes, disguised as a public debate in the newspapers leading up to quota decisions. This leads to an almost planned economy of the availability of professionals.

wikfwikf 4y ago

This is foolish. When public companies give stock to their employees, they dilute the stock as much as if they issued stock and sold it. So the cost of that compensation is the same as if it were in cash. If everyone knows that say, Netflix's stock price is guaranteed to go up 20% a year for the next 5 years, then the market price of that stock would suddenly jump up to the point where it no longer makes excess returns. So the market price of the stock reflects the company's (risk-adjusted) growth potential already. This also applies to non-public companies with any amount of maturity - the marginal investor has a good sense of what the company is worth and does not want to lose out by issuing stock below that. Put these two together and giving employees stock is economically not very different to giving them money and they choosing to invest it in mutual funds. The main difference is that you make your employees' lives slightly harder - with taxation and with the fact that they need to sell stock to get cash for what they want to buy or invest in. The reason that stock options are preferred, especially for private companies, are none of them very good. Firstly employees have an inflated perception of what their company will be worth in the future. They assume that it's going to be AirBnB, not WeWork, not Palantir, and not the failed start-up that you've never heard of. Secondly employees also don't correctly discount uncertainty. Would you rather have the cash to buy your dream home/pay off your mortgage, or take a 10% chance of 10 times that amount of money? To most of us the second option is worth considerably less. Thirdly companies sometimes feel better about giving out pieces of paper that they have an unlimited supply of than giving out their own cash, even though it's a wash financially. And lastly there used to be some tax advantages to firms paying with stock options - those were loopholes which have largely been closed. Making your employees into investors (by giving them stock options) only made economic sense when venture capital money was scarce and expensive. This has not been the case for a long time.

dcow 4y ago
Specifically regarding your second paragraph: I think you’re overlooking the market’s ability to value tech stock. If everyone knows Netflix is gonna jump 20% a year for the next 5 years then everyone would dump their entire savings, take the penalty and reinvest their IRAs even, into Netflix. Why doesn’t this happen?

opportune 4y ago

Because during those 2nd, 3rd, 4th years those employees have much larger compensations than they would get on the market, and companies would rather keep the stock if they don’t need to compensate employees that much to retain them. Many of the companies that are doing this are near-IPO or post-IPO trying to make their finances better. With GAAP, IIUC RSUs are recorded as expenses/count against shareholder equity at the vested price. So if you are a company trying to become GAAP profitable, even if you don’t claw back old appreciated grants, you can prevent the problem going forward/appease shareholders concerned about the impact on GAAP profitability by preventing appreciation. A long-dated RSU is a liability that can become expensive. Also personally I think getting highly appreciated RSU comp can introduce incentives like employees staying at a company longer than they should or want to (ie because they are burnt out or disengaged) since it may not be possible to find another job that compensates you nearly as much. And, it creates very large pay gaps - an entry level employee who joined 2 years ago may be making more than a staff level employee hired recently. I think RSUs are amazing for employees and the vesting/expected refresher details are a very important thing I look at when evaluating working somewhere. But many other people probably just look at the Year1 TC which doesn’t include appreciation or refreshers at all. I think enough people are like me that traditional RSUs won’t disappear any time soon, but I expect more companies to try to see what they can get away with in reducing equity comp.

PragmaticPulp 4y ago

> The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it. This is exactly why companies are doing it. If you're compensated in units of stock and the stock price goes down, you are incentivized to switch to another company to restart the whole process. It's a negative feedback loop. Company struggles -> stock price declines -> employees leave -> company struggles more -> repeat. I know employees want the best of both worlds (stock appreciation when it goes up, refreshers when it goes down) but realistically I expect more companies to move toward defined cash payouts now that we're out of the unusual bull market of the past decade.