RPT-BREAKINGVIEWS-Tech will learn the value of a cash paycheck

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Jan 3 (Reuters Breakingviews) - Technology companies are ready for a New Year’s resolution: shaking their addiction to stock-based compensation. Startups strapped for cash but rich in faith that valuations must go up have attracted talent by paying their salaries in shares. Even mature tech giants have trouble just using cash. In 2025, the incentive to keep this up will dwindle as scrutiny rises.

The ultra-low-interest-rate, post-pandemic period turbocharged the habit. Some 121 tech companies went public in 2021, a level last seen ahead of the dotcom bubble. Many were fast-growing but unprofitable; ostensibly saving cash on pay by using headily valued equity held appeal. Given that the BVP Nasdaq Emerging Cloud Index had doubled the year prior, equity likely also seemed a safe bet for employees.

The trend was already set by their more established peers. Among the Russell 3000 Index, stock-based compensation grew about 15% annually between 2006 and 2022, according to Morgan Stanley analysts, far outstripping roughly 4% revenue growth over that time. At $270 billion, it represented as much as 8% of total compensation among U.S. public companies in 2022. It didn’t just accrue to bosses, with 80% of equity pay going to those below the top executives. The information technology sector leaned furthest into the practice.

There will be less incentive to offer generous packages to junior employees. Tech firms, rather than scooping up all the talent they can find, are now retrenching. They notched over 500,000 layoffs since 2022, according to layoffs.fyi.

Management will also get less leeway from investors. After a decade of growth-above-all, profitability is now prized. In 2022, as interest rates rose worldwide, the Emerging Cloud Index halved. The valuation gap between companies exceeding the rule of 40 – a metric combining revenue growth and EBITDA margin to benchmark profitable expansion – and ones that don’t is widening. Sure, companies might exclude stock compensation in adjusted profitability metrics. But issuing equity is not costless, diluting existing holders and reducing earnings per share.

Even $300 billion industry behemoth Salesforce CRM.N had to reassure investors in August that its capital return program – that is, buybacks – will “fully offset” dilution from its stock plan. It’s a tortured logic to save upfront only to spend cash flow afterwards on compensation. A majority of shareholders opposed an advisory vote on pay for CEO Marc Benioff and other executives in July. With central banks seen cutting rates more slowly as inflation proves sticky, tech will learn the wisdom of paying in cash.

Follow @PranavKiranBV on X

This is a Reuters Breakingviews prediction for 2025. To read more of our predictions, click here.

(Editing by Jonathan Guilford and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on KIRAN/
pranavkiran.t@thomsonreuters.com))