Shopify just released a new compensation model “Flex Comp” and it has reinvigorated my stance that equity is not part of total compensation. That is not to say I don’t see value in company equity. In fact, quite the opposite: The employees who build these multi-million/billion dollar companies should be compensated when they are successful. However, given this success is far from certain and is largely not controlled by the employees themselves, including equity as part of your monthly/annual compensation is disingenuous at best.
Compensation types
My opinion on the purpose of different compensation types:
Base Compensation (Salary) – This is a reflection of the value you provide to an organization. All of your diverse skills, upbringing, education, previous work experience have have some value to the company that employees you: “You don’t get paid for the hour. You get paid for the value you bring to the hour.”
Bonus/Commission – This is added compensation given to the employee should they exceed the expected value to the company. This part of compensation is typically based on a team/individual’s performance and recognizes their work is contributing to the overall quarterly/annual success of the business. Almost always, there is a direct line between what an individual does and the bonus/commission they receive. This is absolutely part of your total compensation.
Equity – Whether in RSUs or in Options, equity is a potential future reflection of the business’ success. Either through stock price rising or some “exit” action taking place. However, rarely is there a direct line between an individual or a team and this type of compensation. There are too many factors involved and the action may be years after the employee has left. Equity does not reflect value of an individual, it reflects the market, the analysts, and so many macro-economic factors that even the experts don’t understand (The recent Figma acquisition is a prime example of this fact. More on that later).
Equity is Gambling
Equity cannot be quantified in the same ways as Base/Bonus and isn’t directly impacted by the employee themselves. Shopify’s new structure exacerbates these facts. If I am a new graduate, perhaps with some student debt, and barely able to afford rent, I almost certainly have to over index on salary simply to live. If I am a well paid senior developer or leader who can easily survive off my salary, I can over-index on stock given it might have better longer term value (and I am likely investing already anyway). By default it rewards the wealthiest people who can afford the risk of a stock slump.
But worse than that, this RSU plan unequally punishes (or rewards) gamblers (or non-gamblers). If I choose, as a non-gambler, to take salary, and the stock does well, I lose. If I am a gambler and I over-index on stock and it crashes, I lose. Should compensation be a gamble? Few people are capable of assessing the economic climate of an industry or a stock; even the people leading the company as Shopify’s CEO, Tobi Lutke, admits! And so it’s unfair for a company to claim your equity is “part of your total annual compensation” when they have no way of knowing what that value actually is. Further, companies make this problem worse, because they often use equity to try and bridge the gap between your expected comp and their initial offer. So you are trading your current value for the potential of future value to backpay you.
Options fall into a same boat. And the Washington Post agrees: “a new generation of workers is having to learn it the hard way. Stock options offer employees a chance to gamble on the company’s success, but not everyone walks away richer.” If you leave a company for any reason, you now have to decide to lay out potentially thousands of dollars for options which you may not even be able to afford and that you have no logical way of knowing if they will ever be worth anything. You’re left with the same gamble. And this analysis doesn’t touch on share dilution and other ways to manipulate strike price that impact the value of options.
Reducing the Gamble
There are absolutely ways to reduce the gamble aspect. It will require some creative solutions and some disruption to a long-standing practice.
For example, Bolt allowed employees to take out loans to buy their options. But this ended up just making the gaps clearer. The rich don’t need the loans, so no issue. But when they laid off 1/3rd of their workforce, some employees owed thousands in debt. Those people gambled and lost. Now out of a job, out of the money, and it is unknowable if Bolt will recover to pay them back.
Coinbase also tried to improve the employee experience by extending the decision time to purchase options (allowing employees to save or to buy them some time for an ‘exit’ event). This policy does seem more reasonable and employee-centric and reduces the need to outright gamble.
It’s clear that there are ways to reduce the risk to the employees, but they are slow to adopt and could cause other problems without thought and guidance.
We all Build a Company
Every employee, from the founding of a company to the day it IPOs or gets acquired, contributes to the building of that success. Equity in a company should be part of compensating for that value, but adding hurdles like: 1 year cliff, 4 year vesting, grants at different strike prices, etc. is just friction to try and quantify a person’s impact, when it cannot possibly be predicted.
Let’s take the recent Figma deal as an example, I am sure several C-level execs were made very rich by the $20bn cash/stock buy-out from Adobe. I do like that employees were given stock in Adobe as part of the deal, but I also think of all the ex-Figma employees.
Forgetting about the cash/stock split, imagine a world where a tiny percentage of the final valuation at acquisition was set aside to recognize all non-shareholder employees over the existence of Figma. Even at 0.1%, that is $20mil. What if that $20mil, which would barely be missed on the balance sheet of investors, was shared between all current and former employees in some way without all the friction? Maybe the split is done by years of service or by title etc. There are many ways to make it fair, but none of them are to include that as a part of annual compensation, because the truth is, no one knows if it’s $1mil or $0. Remove the gambling and increase the reward for the people who help your business succeed.