In the US tech sector, hiring the best employees requires more than just competitive base pay and free snacks. One of the more prized rewards is generous share-based remuneration. The tech stock rout is making these expensive for employers and investors.
In theory, share-based remuneration works because it keeps immediate wage costs down and motivates employees to help their employer succeed. The pay structure should align worker and investor interests. Many companies exclude the cost of stock-based pay from adjusted profit figures on the basis that it is a non-cash expense.
Tech share prices slumped during last year’s investor rotation out of growth equities. Meta’s share price is down 15 per cent over the past year. Alphabet has fallen 27 per cent. Video conferencing group Zoom is off 42 per cent. The value of employee payouts has accordingly dropped.
Companies must either hand out more equity, pay bonuses in cash or cope with some employees quitting when confronted with real-terms pay cuts.
Zoom has picked the first option. It had 19mn of unvested, restricted stock units as of October 31, up from about 5mn the previous year.
The business was a glamour stock during pandemic lockdowns. Its sales growth has since stalled. But as it ratchets up handouts, it is still registering the impact of earlier stock-based pay expenses.
Fast-growing start-ups that lure employees with offers of share awards face other pressures. Airbnb co-founder Brian Chesky was clear that employees with stock options due to expire in late 2020 pushed the company to go public in the midst of a travel sector downturn.
That was costly. In 2020, Airbnb’s stock-based remuneration expense was $2.8bn. Uber beat that when it listed a year earlier, reporting an immediate $3.6bn expense. These are not one-offs. Airbnb reported $930mn of stock-based pay expense last year.
Stock-based remuneration is a drag on net income and lifts the number of shares outstanding. Expect tech companies to buy back shares to counteract dilution.
Zoom spent about $1bn on buybacks in the first three quarters of 2022. Last summer, Airbnb announced plans to repurchase stock worth $2bn. So far it has spent $1.5bn. Despite the cost, the number of shares outstanding has barely moved.
Tech companies who once airily dismissed stock bonuses as a non-cash expense will increasingly take a genuine hit via cash outflows.
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