A 22-year-old history major pulls down $80,000 his first year on the job and gets a company-leased Saab. His office is bigger than yours. Does this bug you?
Better get used to it. In case you haven't hired anyone lately, you should know that job applicants practically swagger these days, thanks to the tightest labor markets in 30 years. Companies everywhere have gone loopy with pay packages, stock options, and pampering perks.
The largess is sweet. A Texas pancake house waves a $4,000 signing bonus at would-be flapjack flippers. A California technology firm hands engineering recruits the keys to BMW Z3 sports cars. Retailers and insurance companies arrange to pay employees' bills, walk the dog, clean clothes, plan honeymoons, sue the neighbors, and send Mom flowers.
Who wants—sheesh, who even needs—to be a millionaire these days as long as you're employed?
Most of this excess will evaporate when the current business cycle ends—as it surely will. What won't evaporate are stock options. They're here to stay. Nowhere is this more apparent than with dot-com startups. Hardly anyone works for an Internet company today without getting stock. Some 160,000 high-tech recruits became millionaires last year by cashing in their options. Now everyone wants to roll those dice.
And Net businesses are happy to oblige. Fat across-the-board wage raises would tank any profit-challenged startup. So Web shops are getting creative about compensation. And the effect is fanning out across the rest of the economy. Annual raises in the United States have fallen from 5.2 percent in 1990 to 4.2 percent in 1998 and 1999. In the place of cash has come stock. Employees by the truckload are suddenly investors.
This switch should come as good news to any fledgling enterprise. After all, options simultaneously save cash and spread a venture's risk to those responsible for making the show a success. But don't break out the bubbly just yet. Managers who blunder into offering creative pay packages risk getting bitten on the behind. Things don't always turn out as expected.
Stock options certainly provide an incentive for hard work—up to a point. Look around Microsoft's offices, and you'll find a whole cadre of employees known internally as Rest and Vesters. They dutifully toil away, watching the stock price climb, then—bye-bye. Once they've earned the sticker price on their Porsche or their summer home in the Cascades, they vanish.
Also, productivity has a peculiar tendency to plummet after an IPO. Many employees rightly understand that what happens on the NASDAQ rarely corresponds to what happens at their desks. Why slave away? Besides, if their company's stock price zooms skyward, they'll cash out, then go looking for employment at the next hot startup.
Fluctuations in a stock's price can also play devil with worker morale. Company managers are adored when the price is lofty, despised when it's in the ditch. A sudden plunge in value can send employees scattering to competing firms like startled prowlers. Worse are the employees who stick around waiting to become vested when the company would be better off without them.
And once you offer workers stock options, you've bought into a pricey poker game. Employee loyalty is secure only until the next round of bids—typically from competing firms. Most dot-com managers know their stocks are worth every penny of the profits they're not earning. They're only too happy to hand out ever more equity in . . . a whistle in the dark. Employees who forgo competing offers because they like their current job are penalized.
Still, equity is the way to jimmy into today's clenched labor markets. There's no going back. But as you're handing out shares it's worth remembering that passing talent can be purchased. Loyalty can't.
taylor&jerome@ziffdavis.com
