AMZN: The hot stock with the ticking time bomb

via Reddit:

This is something I noticed right around the time I stopped working for Amazon a few years ago, and now that they’ve tumbled the tiniest bit I feel like sharing a fair warning for anybody paying attention.

Amazon is an amazing company with incredible long term growth prospects. Due to antitrust issues, they may not continue to grow at the pace that they currently are growing at, but nonetheless the potential is there. This fact isn’t lost on many people: I’ve seen the stock go from $230 when I started working there to an astonishing $1800 recently.

What most people don’t see is the ticking time bomb that they’re sitting on. As a mid level engineer, I was paid competitive wages. However, unlike most companies, more than half of my earnings came in the form of restricted stock units…meaning that my compensation was dependent on stock performance. This percentage grows higher for higher level employees. While a beginner engineer may be 50:50 salary to stock, a director may be closer to 25:75.

What this effectively means is that if the stock ever tumbles for any reason whatsoever, that the engineers and business managers holding the whole ship together all are going to take a massive pay cut. Now what would you do if your company overnight decided to pay you less money? You’d quit. And that is exactly what will happen to Amazon.

I brought this up to several people while working there and they all seemed to brush it off. Their rebuttal was that Amazon could do a couple of things to remedy the situation and keep their talent. They could pay more salary to compensate for the stock loss. Or maybe they could offer more stock to make up the gap. And from the perspective of the employee, that might do the trick. But here’s the problem: both of those options will reduce stock prices even further. Paying more in salary means reduced cash flows which means reduced future investment. Paying more in stock increases the outstanding shares on the market, diluting stock value. It may do the trick of retaining talent, but at the cost of eroding the stock further. It could even end up in a vicious cycle, needing to offer progressively more stock-eroding compensation while the stock tanks further. Amazon might stay alive, but they’ll do it at the expense of their investors.

Amazon will probably be fine in the long run. They have the right long term mentality to make it happen. But I would not want to be the one hanging on to a 50% loss waiting for the long run to show its face. I sold all my stock last year, and while I do wish I had the gains that I could have made in the last 12 months, I don’t regret selling at all. I’ll make less invested in an index fund, but at least I won’t keep myself up at night waiting for Amazongeddon.

UPDATE: It’s common but not as extreme outside of startups. Google, FB, Microsoft, etc., all pay much higher proportions of salary to stock. Amazon gets away with it because their stock moves like most hot startups would move.

50:50 salary/stock compensation seems absurdly high toward the stock side to me, let alone 25/75. 

It vests over a two year period, and new employees generally get a signing bonus when they start to compensate for the fact that their stock won’t vest for the first two years. They do, like you say, have to pay their bills. But after the first two years, it’s salary + stock from then on out.

There is even a salary cap. It seems kinda mystical and people I knew ever only could take guesses, but from what I’ve heard its in the $200k range. A VP, for example, will only get about $165k in salary and the rest in stock. But a VP position at a huge company like Amazon would often be filled by people with C-level positions at smaller companies. I knew one VP that was recently hired when I met him from a much smaller public company where he was CFO and according to financial filings from that company, his salary was in the $2m range. You can be assured that at Amazon he was getting the vast majority of his compensation in stock.

As far as proof, you can infer from sites like Glassdoor or Payscale what the compensation is like. Note though that stock compensation on those sites is typically representative of the value of the stock when it is granted, not when it vests. When people start working for Amazon, they are evaluating salaries based off of their expectations of future growth, but expectations of future growth aren’t concrete numbers that you can use to fill out a survey on a site like Glassdoor. One of my years the stock that was was granted at $230 was sold at $750, but when I started, my personal expectations were for it to be worth about $500 in that time frame. Nevertheless, when I contributed to Glassdoor right after my job offer, I valued it at $230.

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