Falling Share Prices Hurt Recruitment
It is tempting to think only shareholders are suffering from Twitter Inc.’s ) two-week 27% plunge, but that’s not entirely accurate. An unusually large part of Twitter’s employee compensation is delivered through stock-based compensation, meaning employees are getting hurt as well.
The sudden drop in Twitter’s share price comes as potential buyers withdraw their interest in buying the company. Investors had turned bullish after learning that Walt Disney Co. (NYSE:DIS), Alphabet Inc. (NASDAQ:GOOGL), and Salesforce.com Inc. (NYSE:CRM) were considering acquiring Twitter. (Source: “Why Twitter’s stock plunge is especially bad for its employees,” CNBC, October 17, 2016.)
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Unsurprisingly, investors turned equally bearish once those companies dropped out of the bidding process. With each withdrawal, TWTR stock would fall another few points, shrinking the company’s overall size and driving down the total earnings of employees.
One might argue that this is true for all companies using stock-based compensation, but it is a matter of degree. In 2015, Twitter offered $628.1 million in stock-based compensation, more than any U.S. tech firm with more than $1.0 billion in market capitalization.
It represented approximately 18% of the company’s revenue.
Analysts have often pointed to this compensation strategy as proof of Twitter’s larger problems. The company has been far less successful at monetizing its user base than Facebook Inc. (NASDAQ:FB), which is why it leans away from cash-based payouts. It still has a start-up mentality.
Many start-ups are cash-poor and thus offer their employees the promise of future rewards through a rising share price. It is a gamble on the employee’s behalf, but one that can be extremely lucrative. Most of the richest people in the world have become so through owning stock in their companies, including Mark Zuckerberg, Jeff Bezos, and Warren Buffett.
But Twitter is trading 35% below its IPO price, meaning the stock-based compensation is a poor incentive for new employees to join, and for old employees to stay. To be fair, some of the company’s earliest employees are still positioned to make a hefty return on TWTR stock.
Credits: Flickr.com/Hamza Butt
Anyone who joined the company in 2010 or 2011 was issued shares at $0.55 and $1.34, respectively. Right now Twitter shares are trading at $16.83, meaning they are in good standing in spite of the epic drop over the last two weeks.
Employees hired more recently haven’t been as lucky.
