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Amazon RSU stock compensation is great as long as the stock keeps going up

Amazon RSU stock compensation is great as long as the stock keeps going up

Amazon compensation is weighted highly to stock, which is both lucrative and dangerous for employees

By all accounts, Amazon has been doing a bang up effort of taking over the world. AWS has a commanding ownership of the cloud, and Amazon itself appears to be systematically destroying -or remaking- the entire retail industry. All of this success is built on the backs of hundreds of thousands of warehouse workers, as well as an army of engineers, marketers, salespeople and operations experts in Seattle. Those headquarters workers are paid well, which is a good thing, but their compensation is highly weighted to incentive stock, which creates risk for both the employee and Amazon as a whole.

As Amazon continues their success, and the economy gathers strength, the stock price has risen accordingly. Over the same five year time period from 2014 to 2019, Amazon's share price has gone from $400 to $2000. There are tens of thousands of employees whose stock compensation has doubled or tripled over the same time period due to the rise of the stock price.

Why is that a problem for anyone? Let’s take a deeper look at Amazon RSU compensation.

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A typical Amazon compensation structure: weighted to Amazon RSUs

Why would I worry about all of this success? It's the way that Amazon pays all of those tech workers in Seattle. A typical Amazon compensation structure relies on stock (specifically, RSUs) more than any other large tech company. A package for an engineer or a management role in Seattle would look somewhat like this (*my estimates based on Payscale, Glassdoor, and discussions with Amazon employees):

  • Salary: $150,000

  • Starting Bonus: $100,000, paid over 2 years.

  • Stock Based Compensation (RSU): $300,000, vesting over 4 years with 10% the first year, 20% the second, 30% the third, and 40% the fourth.

    • Note: There are some differences in vesting schedules but the “back weighted” nature of this schedule is an Amazon trademark. You have to stay to get paid.

  • Total comp over 4 years: $1m (depending on stock value)

The more senior the employee, the more their pay package skews towards stock. In fact, Amazon base pay rarely if ever goes above $175k in Seattle. It’s slightly higher in San Francisco. Contrasting a typical Amazon pay package with a Microsoft package is where this starts to get interesting:

Microsoft compensation: More highly weighted to base and bonus

  • Salary: $190,000

  • Starting Bonus: $90,000

  • Stock Based Compensation (RSU): $150,000, vesting over 4 years, 25% each year.

  • Total comp over 4 years: $1m (depending on stock value)

The Amazon package SEEMS comparable, but it's actually pretty diabolical. The starting bonus makes up for the relatively low stock compensation that accrues over the first several years. During this time, AWS can weed out the chaff and fire underperformers. Employees that leave voluntarily during that time, of which there are a LOT, have to give back some of their starting bonus as well, lowering their total compensation significantly.

Those that stay face a different challenge: the stock price continues to rise (because it ALWAYS seems to rise, although that is not guaranteed), and by the time the third year rolls around the employees stock is worth double or triple what they thought it would be, and there's no way they can every find comparable compensation and leave. They call this problem “Golden Handcuffs”, and it is a huge struggle for many in trying to decide when to leave.

What happens when the music stops?

The real question is: what happens when the stock price goes down? I know, it hasn't... and it doesn't look like it will anytime soon. But when it does, Amazon will have a huge problem on its hands. Due to their enormous turnover, Amazon's average employee tenure is only 1 year, as you can see below. That will only get worse with a stock slide.

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For a normal company with higher base salaries, a little stock slide isn't a problem. But for Amazon, a stock price slide could decrease the salary of their most talented and important employees by a significant amount - remember that the most senior employees have the highest proportion of their salary paid in stock. These are people who are used to being taken care of and getting raises... not pay cuts. I KNOW that this can be a real problem, because I saw it for myself at Tableau (although the stock has since recovered).

You better believe if the shit ever hits the fan, Amazon will be in quite the pickle. 

If you have a stock grant you should have a vesting schedule

If you just received a new stock grant, it’s important to keep track of your new asset with a comprehensive vesting schedule. That will make it easy to understand how much your shares are worth now, and how much they might be worth in the future. Personal Capital’s free vesting schedule creator will even keep track of the company’s stock price, so you can see the fluctuations over time automatically.

Enter your grant information into Personal Capital’s vesting schedule creator

Enter your grant information into Personal Capital’s vesting schedule creator

Once you submit the details of your grant, you’ll see a full vesting schedule over time. Pretty neat!

A quick guide to Restricted Stock Units (RSUs)

A quick guide to Restricted Stock Units (RSUs)

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The stock option knowledge deficit