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Equity Compensation: Equity and Inequity

In the 1980’s, some tech execs in the Silicon Valley decided they could get more and give more through the broad use of stock options. Equity compensation had been around for decades prior, but generally only as a top executive tool. The new revolution of equity compensation was one of sharing, distribution and a sense of “we each win if we all win.” Of course, stock options made a few very very rich, but it also made many really well off. By the mid-1990’s nearly every company in the Silicon Valley used equity as a way to combat large companies for talent. After a great 5-10 year run, we had the dotcom crash. The cause of the crash was mainly outside investors wanting a piece of the stock option growth. Since they couldn’t get in on the penny-priced employee options, they pushed companies to IPOs and then goosed stock prices to create some weird pseudo-version of stock options where they bought at artificially low prices and sold at artificially high prices. The results were addicting even if it ended in a mini-collapse. So, they tried again with telecoms and one more time with real estate before the whole thing came down like a house of cards. During this time, many forgot the original reasoning behind stock options. They were a replacement for unavailable cash. They were also a cheap, due to advantageous tax and accounting rules

The technology (mainly internet) sector was beaten and bruised, but not destroyed, by the dotcom collapse. As companies started growing after the dotcom era, most had no history with the original purpose of equity. They only remembered the attention grabbing headlines as the IPOs took place. At the same time, the accounting rules had changed and at least on paper, stock options and other forms of equity were not so cheap. The cost now aligned stock options closer with cash. And, the amazing stock market climb from 1988-1999 was behind us to be followed by fairly normal three-year volatility cycles.

As a result, equity was used less as a broad-based tool (few could remember that it was ever used for this purpose.) It was used less as a replacement for cash and instead as an augmentation (plentiful VC money made this easier and guarantees from equity were few and far between.) It wasn’t seen as an innovative way to compete with the big boys for talent, it was seen as a way to compete with them for expensive houses (the rules had changed as large companies also started using more equity as the 2000s got underway).

It’s been more than 35 years since equity compensation creating a revolution in pay. That’s a long time in a world where a new technology may have a life of less than ten years and a blog article a life of less than 10 days. Heck, we are in a world where tweets have a life of 10 minutes and vines a life of 10 seconds. Rapid change often benefits some while leaving others behind. We shouldn't be surprised that every founder feels they need to make as much as possible and every executive feels they need to make more than the upstart founder.

Sometimes our job as compensation professionals is to stand up and be the voice of moderation. If we believe that pay equity truly has a place in our industry then we must ensure that equity compensation is more widely spread and equitably utilized. It’s just one mans’ opinion, but if not us, then who?

P.S. Read Ann Bares recent post “Technology, Innovation and Income Inequality” for more on this topic.

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