Why Should Employees Care About Investors?

untitled3Apple’s stock price is somewhere around $108 today. Over the past five years it has been anywhere from $50 to $132. Medpace was the most recent Initial Public Offering (IPO) on NASDAQ. Thursday, August 11, 2016 their IPO price was $23. By Friday, August 12, the price was above $28 by close of the market. Both of these are great stories, but why should their employees care?

Many people have the misconception that the company gets some piece of the price paid for the stock on the public market. This isn’t true, even at the time of an IPO. At an IPO, the company sets a price to begin initial trading. They get that price for a block of shares sold in the offering. Once the stock has been sold, any gain or loss goes to or from the investors, not the company. This remains true for every one of those shares that remains outstanding after the IPO.

So, in the case of Apple, the price of the stock does Continue reading

FABulous Pay Improves Talent Acquisition

untitledHow are great salespeople able to seamlessly turn every one of your concerns into a demonstration of the prowess of their product? Are they really just that convincing or is there some type of method to their success? The best salespeople personalize every discussion. The trick is years of practicing a simple process until it has become part of how to explain everything. Your recruiters, staffing professionals and talent acquisition stars can do the same with your compensation plans (and you can easily help them).

The key in the absolutely fabulous method is the F.A.B.

F = Features

A = Advantages

B = Benefits Continue reading

Executive Pay Has Been Fixed on Both Sides of the Pond!

6a0134836082f8970c01bb09238e9f970d-200wiIn the past week there have been two major reports describing how to fix executive compensation. The first is from the UK report and comes at the end of a project by the “Executive Remuneration Working Group” (those Brits love their whimsical names) This project was publicly announced September 8, 2015 as an effort by The Investment Association. The second report “Commonsense Principles of Corporate Governance” is from a group of executives in the US. It covers a broad list of corporate governance issues. For the purposes of this post we will focus only on the section titled “Compensation of Management.”

Here’s the basic run down: Continue reading

What Do You REALLY Know About Pay?

6a0134836082f8970c01bb09208a94970d-200wiBefore there were photographs, sailors would return from long trips and describe animals to artists who would then create “official” images. These images helped people feel like they understood what was “out there”. But, in reality, provided almost no useful information. Check out the drawing of the rhinoceros.

You get reports from the Big 4 and compensation consultants. They have pretty charts and easily digestible info-bites. You get market data from survey providers and professional organizations. They include tons of little boxes of information on enormous spreadsheets. There is enough granularity to make you feel like you have everything and can build anything new with grains of sand that are at your fingertips. You have articles from established and new media. They provide insight and new perspective that allow you stay ahead of the trends. You follow twitter and read blogs.

But how much of what you know is factual? You may be surprised.

An article published by Continue reading

Evolving Equity Like It’s a Flying Machine

untitled3Other professionals in HR, compensation and investing frequently ask why I am so passionate about changing the way companies use equity compensation. They point out that the majority of companies follow the same path and many companies (as well as many individuals) have been very successful with the current paradigm (see below for a quick summary). Why mess with something that seems to work at least some of the time?

I ask you to consider the Continue reading

How do Googlers manage their RSUs?

Question (Orig. on Quora):

Since RSUs makeup for major chunk of their future savings, do Googlers feel insecure about stocks dropping significantly ? For example, LinkedIn stocks lost their worth significantly overnight. Do Googlers sell immediately or reinvest into other venues or just hold onto them ?

Answer (by Dan Walter):

I think if “Googlers” as a group did mainly the same thing, the would be deemed far less intelligent than expected.

Doing the “right thing” with RSUs depends on many factors. Some of these are personal, some are market driven, some are income and tax driven and still others are driven by psychology.

Here is what the smart people do.

1) Long before their RSUs vest they take advantage of the financial education and planning opportunities offered by the company or recommended agents.

2) As their RSUs vest that look at the current market conditions, the plan put together with their financial advisor and any indicators of how things may change.

3) They also look at their current cash position, their current concentration of Google stock, and related industry stock as part of their portfolio.

4) They look at what other vesting events may be occurring in the near term future.

5) They look at any potential cash payments they may be receiving soon.

6) After all of that they make a determination to keep or sell the share delivered after vesting. This decision will be different for different people and will be different for different vesting dates.

They key to equity compensation is being well educated about your awards and the choices surrounding them.

In my more than two decades of working on these programs I have found that perhaps a single digit percentage of ALL equity holders truly utilize these awards well. It should be noted that this single digit percentage is across all companies. This means that, at many companies, the percentage is below the fraction of 1% and at others it is quite high. This is mainly due to the amount of time, effort, passion and money the company spends on educating people. BUT, individuals can get much of this information on their own, even if their company is relatively silent.

Do founders with a16z funding agree with Scott Kupor’s post on employee options?

Question (Orig. on Quora):

Do founders with a16z funding agree with Scott Kupor’s post on employee options?

The Lack of Options for (Startup Employees’) Options

Answer (by Dan Walter):

Scott’s answer is a great start to a discussion that has been needed for a long time. The lock step approach to equity compensation that is followed by most startups is not founded in any science, so it is right to question things.

But, extending the post termination exercise period to the full life of the grant is not sustainable. Most of the equity at startups is given the the first 20 (maybe 50) employees. This doesn’t leave much for any else to begin with. Without having the ability to recycle stock options (and other forms of equity compensation) companies would quickly end up with nothing to grant at all.

The accounting rules and lack of cash make it difficult, but not impossible, for the company to provide cash at the time someone leaves. It is also counterintuitive to give leavers money when those who stay cannot get money.

More successful (read profitable or very well funded) companies are looking at creating some type of market for employees and ex-employees to get out from under some of their equity. As these techniques mature I think we will see more companies extend the post termination exercise period to a length long enough to allow people to participate in the next private round of liquidity. This would probably be more fair and reduce the overhang that is a problem for any long-term pre-IPO company. It is a big problem even when the only people holding equity are employees.

I think you may also see growing use of options that have lives much shorter than ten years. These may be linked to cash incentive programs that are designed to drive exercise and hold transaction, once again reducing the burden on lower paid staff members.

Also, options were never meant to be a guarantee or direct replacement for cash. They were intended to be a reward for the commitment to the long-term success, while remaining a fairly inexpensive tool for companies. They were also designed to inspire long-term holding (hence the periods associated with Incentive Stock Options).

If a company plans to be successful with a relatively small number employees (let’s say less than 250) then long-term post-termination periods may be viable. If they company requires a larger staff, or a significant number of senior players, the “10 year exercise period” is likely to drive as many or more problems as the current vanilla solutions.

The key is this: Equity compensation is both very flexible and very complex. Companies tend to follow the leader because 1) Their lawyers like to follow plans that have already been tested in court, 2) Investors like to use plans that fit easily into their pre-made financial models, 3) Consultants often choose the easiest path to approval rather than the best path to success, 4) Companies can get a vanilla plan created much cheaper than a more “bespoke” plan that may work better, 5) Internal HR, Compensation and other related professionals seldom have deep expertise in the design elements of these programs and must therefore simply trust that those giving advice actually know what they’re talking about. There are, of course, additional reasons to follow the leader, but, like building a company, following the leader is seldom the best path to success.

LinkedIn, Microsoft and “Stock-based Compensation”

I just had someone send me an article titled “REASON BEHIND THE MICROSOFT-LINKEDIN DEAL”. The premise behind that article is that stock-based compensation (the accounting term for this piece of the compensation pie) was a major driver behind LinkedIn’s decision to be acquired by Microsoft. LinkedIn did use stock-based compensation more heavily than many companies, but that alone would not be a good reason to desire an acquisition at a value significantly less than the 52 week high. Stock-based compensation includes virtually any type of pay where the individual gets ownership in the company at some discount to the value and it is eventually owned in full by them. In order for stock-based compensation to factor into the decision at all, there would need to be Continue reading

A Small Problem for Compensation Professionals

6a0134836082f8970c01bb090d7e4a970d-200wiThis is not the article I intended to post today. I had something else ready to go, but realized this was more important. I am sitting in my hotel room in San Diego, California getting ready to head over for the second day of the annual WorldatWork Total Rewards Conference. Total Rewards is a BIG category.  In three days it is not possible to dive into every type and flavor of “reward”. But one important family of compensation, equity, is almost completely missing from this year’s event.

Don’t get me wrong. There are some Continue reading

Why Equity and Not Just a Bigger Salary?

6a0134836082f8970c01bb0904b74f970d-200wiThis February, the Harvard Business Review published Stop Paying Executives for Performance” by Dan Cable and Freek Vermeulen. The basis of the article is that we do away with all executive incentive pay and replace it with high (in cases much higher) salary. Their argument is that there is no evidence that pay for performance works and some evidence that it is dangerous. Since this post is part of my ongoing “Stock Options on the Precipice” series (earlier articles: 12345678, 9, 10, 11), I will try and focus only on that one aspect of incentive pay. Perhaps some of you will add additional information in the comments.

Note: We are not arguing that top managers such as CEOs should be paid less. That may very well be the case too, but that’s not the focus of our analysis. HBR , Cable, Vermeulen, Feb. 2016

Let’s start with the premise that pay for performance does not work. There is Continue reading