On May 7, 2016, it was reported that a giant chrome panda predicted the imminent crippling of stock options in the Silicon Valley. Dropbox has been a star of the unicorn sector. But, in October of 2015 and again in April of 2016, their value was written down by major mutual funds, including Fidelity. With their unicorn value and subsequent write down, they have become a high tech “canary in the coal mine” for employee stock options. Just last month Dropbox moved into new digs in San Francisco. In their lobby, they installed a giant chrome panda (their mascot) that is meant to welcome guests with an iconic Bay Area flair of irreverence. The bad news is commissioning and installing an expensive statue does not show that you understand or agree with the recent write down of your value. The good news is that DropBox understands this and added a sign next to the panda that explains the panda wasn’t “the right call”.
In the name of responsible spending, the company has announced it is cutting back on a range of non-cash perks and conveniences. These are smart moves but we compensation professionals know the real money is in base pay and long-term incentives. Base pay is the last thing to be touched, so that leaves LTI if the current measures aren’t enough.
The purchase of the panda and the recognition of it being a mistake are pretty accurate metaphors for the over-reliance of stock options and other forms of equity in the tech sector specifically in the San Francisco Bay Area. (You may notice that since I grew up in San Jose, I often distinguish between San Francisco and the Silicon Valley, which are two fairly different places that share VC money, equity compensation and little else.) As I have mentioned throughout this “Stock Options on the Precipice” series (earlier articles: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10), equity compensation often relies on suspect survey data and company values. This is never more apparent than when the funding dries up, IPOs slow to a trickle and pre-IPO companies become easy acquisition targets for those companies who have already survived the gauntlet.
What most people don't discuss is that the fairly easy gains that come from IPOs often help drive the growth in values of publicly traded companies in those same sectors. When the IPO pace slows it usually takes about a year for the same pressures to drive down publicly traded stock prices. This can be devastating to compensation programs that have been built on the expectation of long-term continuous growth. The current bull market has pushed forward for around 7 years. Historically, these types of markets seldom last more than four years.
When these boom periods end, we see compensation programs implode and companies scramble for foothold in a world where survey data means nothing and history provides no indication of the future. Smart companies are currently working to determine how they will handle underwater legacy equity, compensation philosophies that depend on data that no longer exists and equity plans that have never been used in a down market. Thought is being put into how to protect current Employee Stock Purchase Plans and create new ESPPs that are better suited for a different environment. Performance metrics are being tested and plans are being reviewed for flexibility.
But, mostly, stock options are being scrutinized. Do you stop granting them now in anticipation that they will just end up underwater? Do you shorten the lives of new options so they expire and return to the plan much faster if they do fall underwater? Do you change your method for determining grant sizes since processes based both in dollars and numbers of shares may not work when your stock price is half, or even a tenth, of the current price?
Just think, all of this predicted by a chrome panda that probably should have never been created in the first place. I can't wait to hear about the fun and maybe ridiculous things that your companies (current or former) threw money at when it turned out not to be a good idea. Even better would be the stories of escaping from equity compensation that was no longer compensatory and likely demotivational.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.