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Amazon's stock compensation liability

Amazon's stock compensation liability

There's a storm brewing in Seattle

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, and operations experts in Seattle. 

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 2018, Amazon's share price has gone from $400 to $1,800. 

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So what's the problem with all of this success?

To put it simply, it's the way that Amazon pays all of those tech workers in Seattle. As a proportion of total pay, Amazon relies on stock more than any other large tech company. A typical Amazon compensation package for a more senior engineer in Seattle would look somewhat like this:

  • 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.

  • 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.

Contrast this with compensation for a similar employee at Microsoft:

  • 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. All the while, the stock price continues to rise (because it ALWAYS rises), 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. 

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. 

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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. 

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

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