"Dislike 'Stock Compensation'? Why Tech Company Employees Who Dreamed of Big Wins Turned Away [Jjinbit]"

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunjin Jung] Technology stocks, which had been declining since the beginning of this year, have been gradually rebounding since mid-last month. Some IT companies, including Apple, which is showing its longest rally in 19 years, seem to be recovering. Nevertheless, the Nasdaq index, which is tech-stock-centered in the U.S. New York Stock Exchange, fell 9% in the first quarter of this year, and among the Nasdaq 100 companies, 13 firms including Meta, Netflix, and Adobe have seen their stock prices drop by more than 20% since the start of the year.

Based on this stock price trend, today we will talk about 'stock compensation' paid to employees by global big tech companies. Stock compensation started as a system for cash-strapped startups to attract talent by offering high salaries. It is a method frequently used by Silicon Valley companies. As the company grows, the value of the stocks received as compensation increases, thereby expanding the employees' wealth.

Global IT companies, especially big tech firms, actively utilize this stock compensation system. They offer various forms of stock compensation, such as stock options (the right to purchase company stock) or restricted stock units (RSUs?a performance-based reward system where stocks are granted upon achieving company-set goals within a certain period). In South Korea, IT companies like Kakao, Musinsa, and Krafton are rapidly increasing their use of stock compensation.

"Lack of Motivation to Work"?Limitations of Stock Compensation Revealed

Having covered the basics of stock compensation, let's return to the stock market and share recent news. The stock compensation system has a positive aspect in that as the company and employees grow together and stock prices rise, employees can expect a lottery-like windfall from their stocks. The problem is that when stock prices fall, as they do now, the compensation loses its meaning and can reduce employees' motivation to work.

Stock price trends of major tech stocks such as Google, Apple, Amazon, Microsoft, Nvidia, and Facebook, which have shown a downward trend since December last year (Source = Bloomberg)

Especially in the current situation where companies need to retain talent who are considering leaving, the problems of stock compensation become clear. Bloomberg reported on the 8th of last month (local time) that "employees who have worked for Silicon Valley giants for years believed in stock price increases, making it difficult to leave their jobs, but that is no longer the case." With the end of remote work that spread during the COVID-19 pandemic, the return to offices, and the onset of the Great Resignation era, stock price declines have become a factor driving talent away.

Technology stocks have shown an upward trend over the past decade. Therefore, stock compensation was often interpreted positively. Aswath Damodaran, a renowned professor of corporate valuation at New York University, recently stated, "Stock price fluctuations affect a company's ability to retain employees, especially when a lot of stock has been provided as compensation before. If stock prices fall, the value of stock options or RSUs decreases, reducing the likelihood that employees will profit from them."

Cash Payments Instead of Stocks... Stock Splits Also Being Considered

As these problems with stock compensation have been identified, IT companies are considering countermeasures. Especially in an environment where retaining talent is difficult, if companies do not respond quickly, not only will it be hard to secure new talent, but existing employees may also leave.

[Image source=Reuters Yonhap News]

One immediate measure is cash payments, a traditional form of compensation. Alphabet, Google's parent company, introduced a new cash bonus plan last October, removing the previous cash bonus cap of $6 million. Amazon doubled the minimum salary floor for engineers last month to $350,000. Amanda Richardson, CEO of software company CoderPad, said they raised software engineers' salaries by 30% last year alone, adding, "It feels like a hamster wheel. I don't know how long we can keep this up, but this is the situation for now."

Some companies are exploring ways to increase stock value instead of cash payments. Stock splits are one such method. Although splitting existing shares might seem counterintuitive to increasing stock value, stock splits make shares more accessible to individual investors, increasing demand and potentially raising stock prices.

Amazon, Alphabet, Tesla, and GameStop have recently announced plans for stock splits. Amazon stated last month, "This split will give employees more flexibility in managing their Amazon shares." Elon Musk, Tesla's CEO, explained the reason behind Tesla's first stock split in 2020 as "to increase shareholder accessibility for employees and investors." The fact that this is mentioned in official statements indicates that raising stock prices is linked to employee compensation.

This suggests that the recent market situation is revealing the limitations of corporate stock compensation. With growing global uncertainties, fluctuations in technology stocks, resulting talent departures, and changes in compensation systems, it will be interesting to see how things unfold going forward.

Editor's Note[Jjinbit] is short for 'Hyunjin Jung's Business Trend' and 'Real Business Trend,' a segment showcasing trends in corporate management such as organizational culture and HR systems. The emergence of the MZ generation, the expansion of remote work due to COVID-19, and digital innovation all call for innovation in organizational culture. Based on analyses from major overseas institutions that have not received much attention until now, we will deliver fresh and differentiated information and perspectives.