Last year American technology companies recorded expenses of more than $40 billion in stock-based compensation – about five times the amount of non-tech companies in the S&P 500. To cite one example, Google’s parent company Alphabet issued around $5.3 billion in stock-based compensation last year, equivalent to a fifth of its gross profits.
Google, Facebook and Amazon alone hire around 30% of all American computer science undergraduates, Roelof Botha of venture capital firm Sequoia estimates. The amount of stock these big public companies can spend to hire top talent gives them a distinct advantage. Engineering, data science, artificial intelligence and digital marketing talent are in especially high demand.
Stock-based compensation in Silicon Valley dates back to when most start-ups could not afford to pay employees much. Instead they offered a piece of the company that might rise in value later. But today many of these companies are mature, so their stock is already valuable and being used to “strategically hoard” the best talent, says Patrick Moloney of consulting firm Willis Towers Watson.
Other retention strategies include signing-on bonuses, which can be retracted if an employee leaves the firm prior to a set time period, say three to five years. Another common practice is to offer a “retention bonus” to employees who are considering leaving.
An extremely high cost of living in the Silicon Valley environs is one factor driving up compensation – but the key driver is a ravenous appetite for talent. Apart from so-called unicorns like Uber and Airbnb, which can afford to lure people from large public firms, start-ups can scarcely compete. The high cost of talent also inflates the amount of funding start-ups need to raise.
The retention and hiring strategies being employed by the heavyweights carry risks, The Economist notes. “One is to the entire ecosystem of Silicon Valley. In the future, entrepreneurs with a world-beating idea for a start-up may recoil at the price of a garage to launch it in. Some start-ups are already moving elsewhere to hire cheaper engineers and reduce other costs.”
While stock-based compensation continues to fly somewhat under the radar, investors and the public might start to take issue with it. Spencer Rascoff, CEO of online property firm Zillow, believes a lot more attention should be paid to stock-based compensation. “When it’s ignored by companies and investors it gives companies the opportunity to use stock compensation like funny money”, he says. “It’s not. It’s dilutive to shareholders.”