Lessons from Facebook: Is giving your staff equity the right option?

The staff at social media company, Facebook, and online games maker, Zynga, are in a funk, according to recent newspaper reports.

It’s to do with the employee share plans the two big internet companies run.

Staff received shares in the initial public offerings of both companies. Zynga listed in December last year, and Facebook in May this year. Zynga’s share price has fallen 75% and Facebook’s by 46%.

The massive amount of wealth lost to staff of the high-profile internet companies, calculated by The Wall Street Journal and compensation researcher, Equilar, was published in The Australian today.

Staff at the companies are feeling down about their shareholdings, the newspaper reported, even though the average stock value of staff at Facebook was $2.5 million as of last Friday.

The problem, it seems, is the $2 million more that the shares used to be worth, on paper, several months ago.

A local trend towards employee share plans

Employee share plans are one the increase in Australia too, both in public and in private companies, says Ray Cummings, a director at accounting firm, Pitcher Partners. Cummings advises clients on how and when to establish such schemes, and who to include in them.

“It is happening more and more,” Cumming says. “In private companies, they are tracking along and having one or two executives that they want to provide an incentive to. The principal and employee start with talking about remuneration, but I explain [to the principal] that executives are not doing this for remuneration. ‘You are paying already paying them big dollars and a bonus. What they are seeing is the ownership side’.”

In public companies, the case is an obvious one: Tie the key executives’ rewards to the share price performance, and you have a market price and mechanism for realising the reward.

Companies are moving quickly to give employees a stake in the company for several reasons, Cumming says. “It is in part because of the soft economic times, so the cash isn’t there to pay another $50,000. You are rewarding key employees and saying stick with me, we are in for the long haul.

“Over the last six to eight months we are sensing a spike as people say: we think things are going to happen, so lock it in now, while values are low.”

The risks of broad-based schemes

Giving shares to staff, who have little say in the decision-making, is a less convincing case as an employee engagement mechanism, Cummings says. “Talking from long experience creating employee share plans in public and private companies: if the price goes up, it works; if it goes down, it doesn’t work.”

And it can destroy productivity. “I always caution clients before they set up employee option plans; they can provide a total and utter distraction for employees. They are always asking what they get out of it, about compliance and management of the shares. Many a client says to me, I just wish I hadn’t bothered.”

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