Here’s why tech companies give their employees so much stocks:
For the most part, stock incentive structures are a way for tech companies to stay competitive when they try to acquire top-level talent.
The tech industry is extremely competitive and extremely lucrative, and stock rewards offer certain advantages in terms of growth potential and tax savings.
So if you want to learn all about why exactly tech companies give so much stocks to their employees, then you’re in the right place.
Let’s get started!
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Why Do Tech Companies Give Out Stock? (4 Reasons)
There are a lot of reasons for this, and I’ll cover them individually.
But, the primary reason is that it’s a way to increase monetary compensation for employees without draining the company’s current supply of cash.
It can also offer huge tax advantages for employees.
#1 Competitive Compensation
This is a major component of the entire concept.
In short, tech companies compete hard for top talent.
Tech companies are the most profitable companies in the world (when they succeed), and because of that, the top employees in the industry expect excellent compensation.
So sure, you can raise salaries, but after a point, a slightly larger number isn’t as enticing.
The same goes for other standard benefits like vacation days, retirement contributions, or health insurance.
The thing that offers the very highest level of compensation is stock.
When an employee has stock in a company, they are entitled to a share of the profits.
So, when people know they’re the best of the best, stock compensation is very compelling.
They are confident, as employees, that they can make the company successful.
The stock compensation turns into a monetary reward that a simple salary can’t match.
#2 Scaling Reward Structure
In fact, this leads to the very concept of scaling rewards.
You can try to make a contract where an employee is entitled to raises every year, but it can never match the exponential growth potential of stock rewards.
Since stock is partial ownership in the company, a highly successful employee can genuinely increase the company’s profits and overall value.
When they do that, it’s direct money in their own pockets.
This is a powerful incentive that helps companies attract the best and then retain that talent.
And, it’s extended by the concept of vestiture timings.
Basically, the idea is that you don’t get all of your stock compensation at once.
So, by staying with the company, you get more stock compensation over time, and your scaling reward structure only grows more valuable.
#3 Company Culture
There’s a completely different element to stock rewards that has nothing to do with money.
Instead, it’s about culture.
The idea is that when employees have stocks, they take more ownership of the company (in a figurative sense).
Since their success is now tied in a more tangible way to the company’s success, they are more internally motivated to work hard and do well.
Here’s a way to think about it.
When you have a job for a salary, you work for a company.
When you have stock rewards, you work for “your” company.
That’s a small shift, but it can make a big difference in culture and worker morale, and it’s why a lot of tech companies opt for this route.
Tied very closely with culture is a company’s philosophy.
While there’s a lot of overlap between the two, I want to focus on a stark difference.
A company can adhere to a philosophy that isn’t actually built around worker productivity, morale, or any of those concepts.
Instead, some people strongly believe in the inherent value of worker or employee ownership.
I’m going to sidestep the potential political discussion here and just focus on the philosophy.
If you genuinely believe that employee ownership is a better model for a business (regardless of business metrics), then stock rewards are a great way to achieve that model.
Sometimes, it’s as simple as that.
How Does Tech Companies Giving Stocks to Employees Work? (3 Ways)
That really covers the general reasons why a tech company would want to give out stock to employees, but the motivations might make a lot more sense if we discuss how it all works.
It’s never as simple as just handing over stock certificates.
Tech companies do this whether they are large or small, but the company structure is going to have a heavy impact on how stock rewards might work.
If you employ 80,000 people, then you have to manage stock rewards or else you run out of ownership to give away.
After all, you can’t sell more than 100% of the company.
So, let’s look at stock options, grants, and the other mechanisms that really control these types of reward and incentive structures, and it might shed more light on the why’s we’ve already covered.
#1 Grants vs Options
The biggest thing to understand is that grants and options are not the same thing.
There’s a chance you’ve heard of stock options before.
They’re pretty common for high-compensation jobs, and plenty of tech companies participate in this.
Apple, for example, has a stock option plan for employees.
The way a stock option works is that employees are given a chance to buy company stock at a special rate.
Usually, the rate is set at a discount below current market value.
Most companies keep the exact numbers secret, but it might be possible that Apple sells its stock to employees at a 10% markdown from however it’s trading on the open market.
The point of a stock option is twofold.
First, employees get guaranteed access to buy company stock.
Second, the discount they receive can translate into huge profits if the company continues to grow and succeed.
Meanwhile, grants are very different.
With a grant, the employee does not buy the stock.
It is instead rewarded.
Grants can be implemented in a number of ways, but they’re usually considered part of a compensation package.
One of the biggest advantages of a stock grant is that it isn’t immediately taxed.
Employees will be taxed on profit sharing they get via that stock, and they’ll be taxed if and when they sell the stock.
But, while they hold the stock, it isn’t taxed.
That is a way for companies to give very large monetary rewards without subjecting employees to the highest tax rates out there.
Lastly, company structure influences whether the company provides options or grants.
Generally speaking, stock options are more common with newer and smaller companies that aren’t publicly traded.
That’s because it’s easier to control how much stock is released.
Meanwhile, grants are more common with larger, publicly traded companies.
But, it’s ultimately up to the company.
Apple is a huge publicly traded company, and they still do stock options.
#2 Signing Bonuses
One common application of grants is with signing bonuses.
This is more common with very high compensation positions (like vice president type of positions).
As I mentioned before, a stock grant might be part of the deal to hire someone into one of these jobs.
Since it provides tax advantages, a major tech company can essentially give out a multi-million dollar bonus that isn’t taxed right away.
It’s pretty compelling.
They can even put a stipulation in the contract that the stock grant won’t transfer until the new hire has stayed with the company long enough.
#3 Vestiture Cliffs
That last comment brings us to the idea of vestiture cliffs.
This is a technical term that basically means there are certain time periods that “unlock” the stock options or grants.
So, maybe you can only buy a set number of shares per year at the option price.
Maybe, after five years with the company, the number goes up.
Or, as already mentioned, they can impact grants.
So, your contract might entitle you to a stock grant, but you only get it after a set number of months or years with the company.
It’s even possible to put multiple grant vestiture cliffs into a single contract.
That would mean every five years (or whatever time frame is specified in the contract), you get another pile of stock.
Regardless of the specifics of the contract, the vestiture cliffs are there to encourage employees to stick around longer to get access to more stock.
It definitely plays into stock-based incentive structures.
What if Tech Companies Run Out of Stock? (3 Measures)
Considering all that is involved, you might wonder how a major company like Apple can continue to have stock reward programs.
With tens of thousands of employees, why don’t they run out?
There are a few key reasons for that: shares per percent of ownership, stock splits, and stock buybacks.
#1 Stock vs Percent Stake
This might be the most important thing to understand about stock compensation.
Basically, a company can decide how much stock is worth a percentage of ownership in that company.
So, if it takes a thousand shares to get to 1%, then the company can only issue 100,000 stocks.
That’s the limit, and then they’re completely out.
As you can imagine, a company can set the ratio to require a lot more stock for a percentage of ownership.
As an example, Elon Musk famously bought 9% of Twitter.
To do so, he purchased 73,486,938 shares of the company, and at the time, they were worth somewhere around $35 each.
Those are some crazy numbers, but they highlight the point.
You can split a company into a huge number of shares without giving up a controlling stake of ownership.
All of this is to say that the most important number related to stock compensation is percent ownership (especially if the company is not publicly traded).
While an employee doesn’t need to be rewarded with entire percentages of ownership, knowing what share of the company your individual stock is worth can help you gauge its true value.
That’s especially true if the company is ever going to increase the number of shares available.
#2 Stock Splits
And, one key way to increase the number of shares available is with a stock split.
Using this technique, a company can actually change how many stocks it uses to define 1% ownership in the company.
This is often done so that a company can issue more stocks without diluting their ownership stake.
It’s a great way to make it easier for a wider range of investors to buy into the company, and it can generate cash for company projects.
This can get a little complicated, so we’ll explore how it works with a simple example.
There’s something called a two-for-one split where a company doubles the amount of stock available.
So, if you already own stock before the split, then after this specific split, you will automatically own twice as many shares.
The overall percentage of the company that you own doesn’t change, but the number of shares used to describe that ownership doubles.
Thinking back to how companies might run out of stock, they can introduce a stock split in order to help avoid such a problem.
In the end, doing this would mostly mean that employee stock rewards are being slashed, but the number of shares given out might not be.
More often than not, though, stock splits aren’t about running out of shares.
They’re about enticing a wider group of people to buy company stock to generate cash quickly.
#3 Stock Buybacks
The last thing to cover is stock buybacks.
They have a bit of a bad name, and there is some merit to that, but stock buybacks are really just a business technique.
Whether they are good or bad depends on how a company chooses to use that technique.
In a vacuum, a stock buyback is just a way for a company to get back more ownership of itself, and when applied to employee stock rewards, it makes a lot of sense.
Basically, the company buys stock from shareholders at the current market value.
So, if you’ve been granted 10 stocks as part of your work compensation, you can sell those shares (all or some of them) to the company, and you get cash for it.
The term is “liquidating” your shares.
After the buyback, you can continue receiving stock as compensation, and you can repeat the process when you like.
Now, buyback programs often run for limited periods, so you might have to time selling your stock with moments of availability, and the value of the stock is almost certain to change over time.
But, if you were given stock as a grant, or if you bought it at a discount as an option, then buyback programs are going to be very profitable for you.
You’re turning your stock reward into cold, hard cash, and at least to some extent, this was probably always part of the plan.