In the specific case of RSU's, there is another advantage to the company: In the event of a downturn (where revenues and stock price are correlated, which they usually are), the company automatically cuts everyone's salary. Krugman is a big fan of talking about the influence of the Zero Lower Bound on nominal wages and price deflation. Giving employee's a large fraction of their salary in stock offsets those difficulties somewhat. If the tech bubble bursts, the large companies may not have to lay off as much labor to stay afloat, since their per-unit costs will automatically go down.

Edit: The article touched on this briefly, noting the disadvantage to the employees in the case that their particular firm does poorly while other companies in the market are doing OK. I'm specifically talking about industry-wide downturns. The ability to cut everyone's salary this way may keep unemployment from soaring as high as it would otherwise.

Not sure if this is what you mean, but a big disadvantage is that stocks vest over (usually 4) years. Every year the company can choose to give you more, or not. If not they are cutting your salary.

> If not they are cutting your salary.

Maybe, maybe not. If the stock price is beating inflation, then you're still getting a raise here, too. Failing to renew your stock compensation at the end of the four-year period would be a pay cut.

If the cash portions of salaries are being paid out of revenues (company is profitable), why does the stock price matter?

Downward nominal wage rigidity can be rephrased as: Nobody likes to get a pay cut. (Base) pay cuts piss employees off. When revenues fall, the stock price will fall, and automatically reduce employee salary as a result. But since the human perception of stock compensation is more like "gravy" than "essential to my way of life", I don't think that a stock price drop is as perceived to be as bad as a nominal pay cut, even though real employee pay is cut in either case.

I know employees who negotiated for higher salaries in lieu of stock options. Years later, they were awfully unhappy when their peers made bank off of the stock.

The thing is that employee stock options really can be a bad deal. Sure, you can point to plenty of people that have gotten rich off of them but that doesn't change the fact that so much that can go wrong. If you're trading a salary for them that you could be saving and investing today you should be aware of the risks, sadly it doesn't feel like a lot of people in the industry really are.

- Company fail? Oops, not worth anything - Company succeeded but sold for under whatever the last round was raised at? Oops, not worth anything - it all goes to the preferred stock holders - Raised a huge round at a great valuation? Too bad, you can't take any money off of the table like the founders probably can. Also, any options you now exercise are 'worth' more and oops, you just triggered AMT and now owe a bunch of taxes for income that may or may not ever exist and that you most certainly can't access yet - Company went public and the stock shot up? Great... unless it tanks before your 6 month lock up period is up and you're stuck with a tax burden you can't afford to pay

Layered on top of this is the fact that a lot of the decisions that have real, tangible effects on the above are totally out of your hands (things like how much dilution your company takes on). Even if your founders go to bat for you the investors have very different incentives than you do in all but the totally ideal outcome.

My point isn't that people should avoid accepting options but that they should be viewed as a nice perk along the lines of someone buying you a big stack of lottery tickets. I've had too many friends comparing offers between companies multiply what percentage of the company they'd be getting (if the company is even telling them this) by the company's current valuation and treating that like it's money in the bank.

By all means, trade salary for the opportunities that working at a small startup could give you (like responsibility, an opportunity to learn, coworkers you like/respect, etc...) but be _very_ aware that what the company tries to sell you RE stock is a reality viewed through the rosiest of glasses.

Oh, I know the downside. I've had plenty of stock options in various companies over the years that panned out to sand. None of them paid off. But I'd still do it again.

Yeah, the thing to remember IMO is that within the company, you have access to privileged information and [typically] better deals on equity if you choose to take it. Given the choice between that or taking the cash and putting it into mutual funds or something, it seems like a much better gamble to try your luck. I think of it as a lottery ticket with great odds, and I don't invest more than I'm willing to lose :)

So few people make bank from tech stock that everyone should literally ignore this anecdote and operate in life as if it is not true. This is like saying you're not going to buy that $2.00 lottery ticket, then being mad when someone else wins the lottery. Do not buy the $2.00 lottery ticket.

Then I read complaints about how the owners (shareholders) of the company are making pots of money and the employees aren't, and how brutally unfair that is.

BTW, 20 years ago I read a statistic that Microsoft had made 10,000 millionaires just in the Seattle area alone. In the early 90s, an acquaintance would refer to his car as his "quarter million dollar Oldsmobile". I finally asked him what he meant. He laughed, and said that he'd cashed in his MSFT stock options to buy it, and that was what the options would have been worth when I asked him.

> Then I read complaints about how the owners (shareholders) of the company are making pots of money and the employees aren't, and how brutally unfair that is.

The employees should be receiving dividend-like cash bonuses and should be receiving salaries that actually afford the cost of living in their geographic location (in addition to legitimate retirement contributions, 40-hour work weeks, generous vacation, and legitimate insurance benefits, which all should simply be regarded as the absolute bare minimum conditions of employment period).

Saying it's either stock or no stock is a false dilemma. The same amount of compensation should be shared with the employees, just not necessarily in stock format.

I'm also not opposed to someone who chooses to take company stock instead of an equivalent cash bonus. If you weigh up those risks, you're a grown up and can choose for yourself.

But for most people, taking a cash bonus and putting it into a simple low-fee index fund or ETF is going to be worth a ton more than their company stock, while also lowering their overall risk, since a market downturn won't affect their regular paycheck and since their regular employer won't affect their return to their outside investments.

The point is they should have the choice.

> BTW, 20 years ago I read a statistic that Microsoft had made 10,000 millionaires just in the Seattle area alone.

BTW I read that someone somewhere won the lottery ... better go buy a ticket.

I agree it's a false dilemma. I like supporting alternatives by citing examples in low-margin industries. Publix keeps coming to mind as they've been giving employees paychecks + stock bonuses since the beginning:

http://www.forbes.com/forbes/welcome/

Founding family got rich, too. Costco always did good pay and benefits with what HN would call a subscription model. Plenty companies referenced here have a subscription model.

Whoever stays years at a company is already getting screwed.

What's the best way to eliminate the market risk you get when you're issued RSUs? Short selling? Put options?

I could be wrong, but I think most companies prohibit their employees from short exposure (shorting equity, being long equity puts, or short equity calls) to the company, even if they're still net long the company.

I may not be understanding your question but I generally have advised my wife to sell most of them as they vest. Having all of your compensation in one company (salary as well as thousands of dollars in stock) is too undiversified in my opinion. They are also much less liquid then you'd think as there are often long blackout periods with short windows to sell so it's quite tough to time the market.

Puts work well if you can acquire the options at a reasonable price (they're often quite expensive though).

Mark Cuban did this when Broadcast.com was acquired by Yahoo!

However, the contracts may be illiquid / not available for smaller market cap companies.

Companies may explicitly bar these.

At the end of the day its up to the employees to realize what they are getting into.

Typically for a tech employee when it comes to compensation the equation is salary + bonus + RSU/options. Its important when considering a position to think through each piece.

In regards to the bonus how does it get determined what the amount is, is it known upfront, does it typically get paid out at 100%, over 100%? What is the percentage amount for the last x years?

For the RSUs/Options if its an established company how stable is it, if its a startup then how likely is the success of the company (in my case if its a startup then I personally don't depend on this part of compensation).

Only publicly traded tech companies give that.

For the others (especially growth startups that aspire to exit) it is just salary + pitiful options.

There isn't anywhere near parity to make up for the lack of comparable bonus or liquidity of RSUs.

Well from my personal experience at startups quite a few of them do give bonuses. Its a way for them to have control over whether you get part of your compensation. Often based on performance (for the reputable ones) but sometimes just based on whether they feel like paying it!

The bonus isn't anywhere near what the larger tech companies do. I get it, they are cash strapped, my perspective is that they should go back to the VCs and double the size of their investment rounds to accommodate bonuses that are nearer to upwards of 50%-100% of the base salary. And the boards (which also include the VCs) shouldn't be balking at the idea of having employee equity pools greater than 5%.

They are acting like they are doing you a favor, but the current reality is based on greed (from the board) and it will simply take a collective of engineers to simultaneously realize they are undervalued, just like some financial professionals realized in the 80s.

The stock options ideally align employees with the goals of the business. Anyone who believes in the company they work for should desire options over cash.

Not if you want to diversify. If your job is the source of your cash income and is also the primary source of equity, that's a problem, because if the employer has a downturn, you lose twice.

It's generally bad if your cash income is highly correlated to your equity value. Claiming that stock compensation aligns employees with the company is just nonsense. You want to hire smart people, right? Well, smart people will want their income diversified.