Sunday 6 November 2022

What Many Tech CEOs are not telling Shareholders- Destroying Shareholder's Value by Paying Workers Shares

As many would know, the Tech industry offers an extremely good pay to its employees. However, to conserve cash as well as they tend to be cash burning in Ops, these companies pay their workers by offering a large amount of share based compensation. This works well when share prices are high but it dosen't work well when share prices are low. 

Let's show this using Twilio as an example. This is undoublty one of the better managed company with a product that is widely used by other businesses. However, it is likely share prices will continue to crater due to their compensation package and high pay to workers.

Twilio's Share Based Compensation Package

To attract talents, Twilio gives them a large number of shares as part of their pay package. At its peak where it had 7,867 staff, Twilio was paying them $650 million in shares as part of their pay package during the last 4 quarters (highlighted in green) ; this works out to an average of US$82,000 per year per employee just on shares based compensations.

Twilio Quarterly Results

As of end March 2022, Twilio's market capitilisation was US$30 billion, hence US$650 million equated to an issuance of 2% of shares or 2% in share dilution.

Fast forward today, Twilio's market capitilisation is US$7.8 billion, a US$650 million compensation package will mean 8% in share dilution every year. Even under the assumption that Twilio has completely retrenched 11% of staff, a revised US$578 million share based compensation equates to an annual 7% dilution in value. 

Twilio (and other Tech companies) cannot sustain such sky high pay packages to its workers  because it will just erode existing shareholders excessively. Its either their tech workers have to take a pay cut or more of their compensation has to be in cash instead of shares. The latter will affect the promises of Non-GAAP EBITDA profits made by CEOs.

Tech Companies Promising Non-GAAP profitability

Due to the downturn, tech companies have promised that they will be non-GAAP profitable; a dangerous promise that has been made by Tech firms both in USA and Singapore. The truth is that fulfilling their promises may mean existing shareholders will suffer a tremendous destruction in their current investments.

As seen in the Twilio example, maintaining the same pay and amount in share based compensation will mean a massive dilution for existing shareholders. Yes, these tech companies can reduce the share based compensation and pay their workers a larger proportion in cash. However, this affects their non-GAAP profits as more cash are expensed. The CEOs will fail to deliver their non-GAAP profitability promises within the target deadlines.

Either way, it is likely Tech companies will be severly diluting shareholders due to them paying their Tech workers too well (in shares) or share prices will crater because the CEOs fail to meet their profitability promises.

CEOs of Tech Companies are making dangerous promises to the market and its shareholders. Either it has to cut the pay of its Tech workers or it has to destroy the value of its existing shareholders.

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