The fast-rising valuations of tech companies have also motivated firms to change their employee incentive structures.
Stock options are one of the main tools for attracting talent to technology startups. In addition to a base salary, an employee of a startup often receives stock options in tranche, as an incentive to stay on board for several years.
However, this structure, often referred to as “golden handcuffs,” is starting to change, as many companies in the tech sector face a tight labor market.
Since many employees do not want to commit to longer employment periods, companies are offering incentive packages that include yearly grants instead of long-term exercisable options. That way, the employee gets different amounts tied to their performance without being required to wait a few years.
The Radford Global Technology Survey, which looks at tech companies’ compensation structures, has tracked changes in the size of new-hire equity awards versus ongoing equity awards. It finds that new hires now receive more significant upfront grants in the form of stock options and restricted stocks. Technical employees such as software and hardware engineers, are more likely to receive those grants instead of the traditional multiyear stock-option incentives.
Many prominent technology firms have recently joined the trend. Ride-sharing company Uber and Stripe, the electronic payments firm, recently introduced an accelerated one-year options vesting program for new employees in order to remain competitive in the workplace. Lyft, another ride-sharing platform, offer similar packages to existing employees to prevent them from leaving the firm early. This goes against the tradition in tech companies of trying to keep employees for at least four years.
The fast-rising valuations of tech companies have also motivated firms to change their incentive structure. Stock volatility and the overvalued unicorns make it harder for companies to value their options. Accelerated one-year grants can provide employers and employees with more predictable financial valuation and reduce financial risks to the firm in the case of even higher valuations moving forward.
Changes in the terms and schedules of many stock-option programs, however, could impact tax strategy and planning. For example, faster exercised grants may expose employees to capital gains sooner.