Author's note: This is a sensitive topic for much of the intended audience. If you're currently experiencing psychological distress due to the market downturn, do not rush to read this article. You will not find any short-term solutions in it. Take a deep breath, go for a jog or hike, etc. Come back to read it when you are in a better state of mind.
Stock-based compensation has been widespread in the tech industry since the late 2000s. The idea was to align employee incentives with those of the company: if the company did well, its stock would increase, and thus boost the total compensation of employees.
This has worked out fairly well during the bull market from 2009 to 2022. All tech employees had to do was hold onto their vested shares. Over time, the broad uptrend in stocks would increase the value of these vested shares. You couldn't go wrong with this approach. Even the March 2020 crash was only a short-lived speed bump. With the current downturn in stocks, we are starting to see that narrative unravel.
The bear market of 2022 should be an awakening for all employees of tech companies that rely on stock compensation. They can no longer assume that tech stocks will go up like they have in the past. A major shift in mindset toward stocks and investing is necessary for tech employees' financial survival.
Background
A typical tech company compensation package includes a base salary plus a stock grant consisting of restricted stock units (RSU's). Each RSU converts to one share sometime in the future according to a vesting schedule. The number of RSU's in the stock grant is a computed by a fixed dollar amount divided by the stock price at grant, and vests over 4 years.
For example, one might have a $200k base salary plus a $100k stock grant. If the stock price at the time of granting is $100, the grant is 1000 shares, with 250 shares vesting each year. If the stock price increases by 20% a year, then the $25k could become $30k, $36k, and so forth. With annual stock refresh grants, these can quickly stack up to a substantial bonus over the original amount. As employees get promoted or hired into higher levels, the stock grant becomes a greater proportion of the total compensation. You can read more about RSU's here and here.
Some of the total compensation numbers you often hear about in the $400k-$800k range are often a result of the larger stock grants at higher salaries boosted by stock appreciation. A senior engineer could have a base salary of $250k and an annual stock grant of $250k that doubles due to rapid stock appreciation over the vesting period. This happened at Netflix ($NFLX), for example, whose stock grew a whopping 440% from October 2016 to October 2021.
The problem
Many tech stocks have been down since peaking months or sometimes over a year ago. To give you an idea of how much your stock compensation could have fallen if you joined one of these companies at the start of 2022, here are some year-to-date performances of major tech stocks through 23 June 2022:
- Netflix ($NFLX): -70%
- Block ($SQ): -61%
- Meta/Facebook ($META): -54%
- Uber ($UBER): -51%
- AirBnB ($ABNB): -45%
- Tesla ($TSLA): -42%
- Amazon ($AMZN): -35%
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For tech employees, this is an automatic reduction in compensation. The more senior employees with higher amounts of stock grants are especially hard hit. That $700k total comp at Netflix could be worth only $350k now. And for those who have held on to their vested stock, it is doubly painful to watch one's net worth take a big hit. I know one former coworker from Alphabet ($GOOG/$GOOGL) who joined Meta in October 2021. Since then, the value of her Meta shares have lost over half their value. As she is quite senior (10 years of experience), she could have lost 1/3 of her total compensation.
Many tech employees are exposed to their company in multiple ways: employment, upcoming stock vesting, and vested stock holdings. If this is your financial scenario, you are triply exposed to one company. This is a terrible setup from an investment perspective.
Dollar cost averaging (DCA) is a common response to the possibility that big market drawdowns could happen during your earning career. Yet the annual cycle of stock grants and refreshes is already a form of DCA. Except into your solely company stock instead of into a broader portfolio of stocks. When your total income falls 25-50% due to a market crash, you will not have the extra cash to buy the dip to add to your existing holdings. We need a more diversified and sophisticated strategy.
Waiting for the market to turn around is no solution. When your stock falls by 50-75%, it will require a 100-300% gain to return to its original levels. It could be years of waiting. We need a better strategy than waiting and hoping.
A new perspective
If you're a typical tech employee, you likely have focused primarily on your career while adopting a simple buy-and-hold approach toward your stock holdings. With such a large portion of your income (and net worth, depending on your years of experience) in stocks, the impact of a stock market crash is magnified, and deserves a bigger portion of your focus.
You must change your mindset to view yourself as both a professional employee and a professional investor. You can do this by applying investment concepts such as risk management and trend analysis to your company stock. Here are some strategies:
- Plan your lifestyle around a budget based on your base salary, bonus, and no more than half your stock compensation. This will allow your lifestyle to handle major hits to your total compensation.
- Diversify out of your company stock. Everyone wants to believe in their employer. But the stock market doesn't care what you believe in or hope for. Periodically selling company stock after they vest is a good way to do reduce your exposure to the fortunes of your employer and its stock. I sold my vested Alphabet stock periodically when I was an employee.
- If you want to continue investing in the tech sector, you can always reinvest the vested share sale proceeds into shares of other tech companies, or even into tech-exposed ETFs such as $QQQ and $XLK. With these investments, you are not subject to employee trading restrictions before earnings dates.
- Learn to spot signs of weakness in the market. For example, some tech stocks and sectors such as biotech and small caps topped out weeks or months before the S&P 500 index did in January 2022. This is what led me to eventually sell my Alphabet stock after the market bounced in March 2022. You could use these indicators to start selling your stock holdings. With your company stock, it becomes even more necessary to sell them in advance, as you might not be able to sell during the exact market top due to employee trading restrictions before earnings dates.
- Understand that investment is a probability game. Taking some losses is part of the game, rather than a reflection of you having done something incorrectly. Few investors have a success rate of 100%. The key is to improve your odds of success so that your winners exceed your losers.
Going deeper into investment strategy is beyond the scope of this article. For now, focus on adopting a mindset that reflects the new financial reality of the 2022 bear market.
Juggling the dual roles of tech employee and investor is no small task. You must ask yourself how much of your energy to devote to one versus the other. The investor role could initially be as simple as automatically selling your vested stock, and later reinvesting it into other securities. Take some time to decide what level of commitment is right for you. It may be uncomfortable to shift your mindset this way, but so is the prospect of facing bigger losses in the market.
Disclaimer: I am not a professional investor or financial advisor. This article is not personalized financial or investment advice. I am not responsible for your investment results. It is your responsibility to do research prior to investment decisions.