It all starts with equity compensation. Really. Equity is not just compensation, it’s a key player in the global economy. Amy unpacks the chain reaction between corporate metrics and equity and shares how equity compensation plays a role in the economic cycle in ways you may not have thought of before.
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Amy Reback
Welcome back, listeners. Happy to have you with us on Equity Unpacked® today. I'm Amy Reback, your host from the Stock Plan Services Team at Charles Schwab.
Can you believe it's already year three of our show? We owe all of that to you. Really pleased to have you with us any day, anytime, especially today. Some of the journeys we're looking forward to are delving into pay for performance, tips for conversion and onboarding or going private, some tech and some trends, and many, many others. And of course, if there's a trip you'd like to take with us to explore a specific topic or if you'd like to be a guest on the show, please email us at equityunpackedideas@schwab.com. Really looking forward to your suggestion, and thanks again for listening.
Now, today we're going to do a Quick Takes episode on, drum roll please, the supply chain. It's something that we've been hearing about for a long, long time. Just about every time you turn on the news or if you listen to Marketplace or any of the other news podcasts about the economy, you're going to hear about the supply chain. And the story continues to evolve. At first, it was shortages. And now, with inflation, it's too much inventory of some things. So how does all of that work, and where does equity comp play a role?
So what I'm going to do today is give you a scenario. I'm not going to talk in big terms. Just let's take one scenario and then play it out. I'm not going to, by any means, get all of the points that probably should be from one step to the next, but you'll get the idea.
So, in general, for every action, there is a reaction, which creates a chain of events that is almost never-ending. And if you were able to find an endpoint, it would be so distant from the initial action or cause that they probably seem completely unrelated. Now, that applies to just about any scenario you can think of, but to avoid an existential crisis, let's take a look at how this applies strictly to the global supply chain and equity compensation.
So let's start with technology firms. The evolving role that technology plays in our lives means that just about everything we use or consume involves chips. And not the kind we eat, but silicon chips. And if you look at cars, devices, toys, ovens, locks, thermostats, watches, even our pets, they all have chips in them. Now, for tech firms that build hardware, they couldn't keep up with demand, and they ran out of goods to sell. There's that new car shortage, scarcity of services and running the world, failure to deliver on the next version of their products. So if they have fewer products to sell, they can't meet the rising demand, and prices start to go up to record levels. It prices out a lot of buyers and increasing costs for those who still remain in the market. Then there's fewer sales for hardware producers and increased cost for their service provider customers. And that means a decrease in revenue for both. And when that revenue drops significantly, the stock price for those company drops. And for tech firms, it drops fast.
So that brings us to the point where equity compensation enters the supply chain equation. Now, companies, particularly big tech companies, grant equity to a broad base of their employees for talent retention and acquisition, also for performance and a significant component of their overall compensation. When the stock price of their employer drops, the value of those equity awards drops as well. And suddenly, their equity plan is not meeting the goals it was intended to address. Compensation drops, ESPP shares are underwater, vested options are out of the money. Employees start to leave. And the firm has rising costs associated with turnover, onboarding, and training, accelerated rising costs, further impacting productivity and potential to sell additional products and services when they're already behind. And the stock price drops further. Reacting to rising costs and reduced revenue, the firm starts to initiate layoffs.
And you've seen the headlines. There were lots of Silicon Valley firms recently laid off somewhere between 10 and 15% of their workforce, numbering in the hundreds of thousands across the board. Most, not all, but most of those employees immediately lost any unvested equity awards.
Now, backing up just a little bit, while companies are laying off part of their workforce, they're likely to be changing their granting practices and plan documents in an effort to retain other populations. And that means granting more shares at a lower price. Typically, that results in significantly more outstanding shares of the stock, depending on the size of the firm. Now, think about whether or not that could have a long-term impact on the stock price as well and its recovery. So you can really start to see how equity compensation plays a huge role in the economic cycle in a way that you may not have thought of before.
So there it is, folks. When a butterfly flaps its wings in Tokyo . . . well, you know what I mean. The global supply chain and equity compensation are directly linked in that action-reaction paradigm. Equity is not just a part of someone’s compensation; it’s really a player in the global economy. And big shifts in mechanisms like the global supply chain can impact the financial futures of your participants, their families, and your entire workforce—in ways you may never have considered or even seen coming. And that, fellow travelers, is how it’s all connected.
Thanks for joining us today. Really happy to have you with us, as always, on Equity Unpacked®. Until next time, safe travels, everyone.
For important disclosures, see the show notes or visit schwab.com/equityunpacked.