The unintended consequences of rising stock prices – decreased risk taking among employees

Rapid raise in stock prices result in some people in the company being overpaid.  This can be very bad for the overpaid employee and also very bad for the company.

Many tech companies are going public right now and many tech companies have seen significant share price increases in recent years.  We can expect that most of these are facing real internal motivational challenges that could be extremely hard to overcome.  
The weirdness of RSUs in public companies

Let’s say that a company gives you an offer of $100k salary and $500k in RSUs vested over 5 years.  That essentially means that the company values you at $200k per year (as stock and salary are fairly fungible in public companies).  

Let’s say the stock goes up by 20% after six months.  The RSU grant (over 5 years) is $600k and your yearly comp goes from $200k to $220k (a 10% increase).  No big deal for the company as you are probably worth more than 10% more than what they originally offered you because you now have been at the company for 6 months, understand the processes there, have grown your skills, etc.

But now let’s look what happens when they stock goes up by 300% after 3 years (which happens in the tech world).  Now the original grant of $500k is now $2 million (over 5 years).  So the stock alone is $400k per year.  Add in the salary (with assuming some raises is now $150k/year) and you pulling in $550k per year.  

This is when things get a bit hairy.  Because likely the company only values you at $350k so you are making $200k more than you are worth. In fact, if you quit the company and went to work for its top competitor, you might have a hard time getting more $300k.

So now both you and the company are in a bind.

First, you cannot leave the company.  In fact, your biggest fear is getting fired.  So unless you are a big risk-taker, you are likely to “play it safe.”  You are going to work on things that have a high chance of success.  You are not going to rock the boat.  You are not going to stick out your neck.  So you are likely going to spend the next two years doing very average work, not push the envelop, not ruffle any feathers.

And if you are in this position, it means that many people in the company are in this position (because the stock went up 300%) so that means many people are going to start acting just like you. And that means things get ultra political (because people are going to try to point blame away from them).  

From the company’s perspective, they are in a bind.  They can’t fire all the overvalued employees because then no one would join their company in the future (as the promise of the stock going up is one of the reasons that high-performers join companies).  But if they do nothing, they lead to a paralysis in their organization.

Of course, when your five year vesting is over, you are 100% going to leave the company.  Because your new RSU grant is going to be a lot lower that the value of the current grant.  You might go from getting $400k/year in stock to getting $250k/year in stock.  And even though the new lower comp is still higher than your market worth, it is very hard for the ego to take a lower comp from the same company.
This presents lots and lots of problems.  

From the company’s perspective, it is overpaying tons of people and those exact people are performing worse than the fairly paid employees (because the overpaid employees are “playing it safe”).  

So the people who the company is paying the most are often just propping up the status quo and not moving the needle.

For the overpaid employees’ perspective, it might be worse.  Sure, they are making a lot more money than they are worth.  But they are settling.  They are atrophying.  They are made to be just mediocre employees and feel that they are preventing from reaching their full potential.  And they could be in this state for 2-3 years — which is a really long time.

Summation: The companies with the fastest rising stock prices will also have a high number of employees who will want to play-it-safe (because their biggest fear is getting fired). 

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