Tech Companies Rethink Stock-Based Pay as Regulatory Pressure Mounts
AInvestFriday, Jan 3, 2025 8:00 am ET
1min read
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Recent scrutiny over stock-based compensation practices is compelling U.S. tech companies to reassess their reliance on issuing shares as part of employee remuneration packages. This shift comes as companies that previously depended on stock awards to conserve cash might find this strategy less feasible by 2025 due to increasing regulatory pressures.

During the post-pandemic era of historically low-interest rates, it became common for companies—especially initial public offerings (IPOs)—to pay employees in stock. The year 2021 witnessed 121 tech firms going public, a peak not seen since the dot-com bubble era. This trend was particularly appealing considering that many of these companies were rapidly growing but not yet profitable, making overvalued equity an attractive means to decrease cash outflow for salaries. The BVP Nasdaq Emerging Cloud Index, which monitors valuations of cloud software companies, doubled last year, giving employees some confidence in the stability of stock as compensation.

This strategy had initially been adopted by more established firms. From 2006 to 2022, stock compensation among firms in the Russell 3000 Index increased annually by approximately 15%, substantially outpacing the 4% average revenue growth during the same period. In 2022, stock compensation accounted for $270 billion, equating to 8% of total remuneration expenditures for publicly traded companies in the United States. Remarkably, around 80% of these stock awards were directed to employees below the executive level, with the information technology sector being a significant beneficiary of this practice.

However, the impetus to offer generous compensation to junior employees is waning. Tech companies are now more focused on budget curtailment rather than acquiring all available talent, with over half a million layoffs across the industry since 2022. As the market environment has shifted towards requiring profitability alongside growth, investor tolerance for stock-heavy remuneration packages is dwindling.

Companies are also confronting the financial implications of share issuance, which although excluded from some adjusted earnings metrics, carries the downside of diluting existing shareholders' stakes and reducing earnings per share. Salesforce, with a market cap of $300 billion, had to assure investors in August that its share repurchase strategy would fully neutralize the dilution effect of its employee stock plans. The logic appears convoluted, involving saving cash flow to later deploy in compensating for dilution.

With the challenges posed by persistent inflation, the pace of interest rate cuts by central banks is likely to slow. Consequently, tech firms are increasingly urged to utilize cash for compensation, signaling a potential shift in compensation strategies as they navigate a changing financial landscape.

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