As a partner at SPMB, one of the largest retained executive search firms specializing in technology, I’ve seen firsthand how the economic changes of 2023 have affected compensation packages.
Are Stock Options Still a Thing?
Equity in the form of stock options will always be an important part of executive compensation packages, especially for early-stage tech businesses. However, candidates are becoming savvier about companies with inflated valuations. Companies that want to attract the best talent should create a comprehensive offer that includes a competitive base salary, bonuses and benefits in addition to equity.
As the economic landscape continues to evolve, so do the factors that motivate both candidates and employers in the job market. As a job seeker or hiring manager in 2023, you’ll want to get informed on the latest trends so you can have realistic expectations on compensation and know where to focus your negotiation efforts. I’m going to share these changes so you can stay ahead of the curve.
Candidates Want Cash
According to Preqin’s latest valuation report, down rounds — instances when a portfolio company is valued below its previous funding round during a new funding round — already reached nearly five-year highs in 2022. The situation may continue to worsen, as Bloomberg recently reported that more than 400 unicorns haven’t raised new funding since 2021 and when they do, they may need to accept lower valuations.
The repercussions of this situation are that employees within these companies now possess equity that is underwater. This means their equity, whether it be stock options, restricted stock and/or restricted stock units, has a current value below the price at which they were originally granted. Consequently, more candidates are open to new opportunities and a healthy amount of candidates assessing new opportunities have become wary of companies with inflated valuations.
I’ve witnessed that within late stage venture-capital backed job opportunities, more candidates are prioritizing cash over equity when evaluating offer packages. This emphasis on cash becomes even more pronounced when candidates must factor in inflation and a rise in living expenses during their offer deliberation.
Companies Are Being More Frugal
Over the last few years, the competition for talent was so tight that my clients often increased their compensation range to attract the best talent and to compete with the lofty salaries, signing bonuses and equity packages the competitors were offering.
The power dynamic has shifted from employees to employers, creating a buyer’s market. As a result, companies are using this opportunity to adjust compensation packages for new hires. This means that executives are still compensated well, but their compensation is more in line with the value they bring to the company, rather than inflated in an attempt to out-bid the competition.
Candidates Should Be Prepared
If you’re a candidate seeking a new role, be aware that even the most stable technology companies are being more cautious about managing cash flow and extending runway. To ensure a smooth process, be transparent about your compensation expectations from the outset, avoiding surprises later on.
Be proactive and prove your worth
Instead of waiting for the perfect opportunity with ideal compensation to come your way, take a broader perspective when conducting your job search.
If your dream company is hesitant to make a full-time commitment due to market conditions, consider proposing to start as a consultant or advisor in the short term. This approach allows you to establish trust and demonstrate your value upfront, mitigating risk for both parties involved.
Focus on Your At-Risk Bonus
If you want to increase your yearly take-home pay, focus on increasing the at-risk bonus component as your anchor point. Market conditions often make companies more receptive to adjusting the at-risk bonus rather than the base pay. By understanding this dynamic, you can better position your negotiation efforts and outcome.
Hiring Managers Should Be Prepared
Companies should take advantage of the current climate and recruit candidates who may not have been available before. However, remember that the best candidates will always be in high demand.
Make Compensation Mutually Beneficial
Overall, create compensation packages that mutually benefit the business while incentivizing and rewarding outstanding performance. Some examples of this would be bonuses and equity refreshers based on personal and company achievements.
Reassess your Compensation and Benefits
If you’re operating a late-stage venture capital-backed business, be aware that incoming talent will scrutinize your company’s equity package and valuation. To secure top talent, reassess your compensation packages and overall benefits. Adjust your equity offers as needed and make sure that other aspects of the compensation package are compelling and competitive for the long-term.
Avoid Excessive Disparities in Compensation
While it’s acceptable to tailor compensation packages for new hires, be careful not to create excessive disparities between them and other leaders at the same level in your organization. It’s crucial not to underpay your talent, as the long-term impact could be significant. If employees feel undervalued, they may start seeking job opportunities once the market shifts. Even in the short term, they may not have enough motivation to give their best in the role you hired them for.
In today’s ever-changing economic landscape, candidates must adapt and find innovative ways to seize the best job opportunities and accompanying compensation packages. Likewise, companies have a greater need for exceptional talent in order to excel. Understanding the needs and aspirations of both parties makes it possible to create a compensation agreement that benefits everyone involved.
