- According to a Credit Suisse study conducted by Patrick Palfrey, companies that have outsized stock-based compensation programs have trailed the broader market by 9.2% this year alone.
- With U.S. inflation running white hot, bets on future growth have been scaled back as the Fed increases interest rates,
One of the biggest challenges for a prospective employee is trying to figure out if they should accept a more modest package at their next jump to receive more stock.
In the over a decade since the U.S. Federal Reserve started implementing its loose monetary policies in the wake of the 2008 Financial Crisis, stocks have been on a tear and few employees balked at the idea of taking more stock for less upfront salary.
But a compensation strategy that has worked for so many years has now left many employees falling behind as tighter monetary conditions see stocks fall.
According to a Credit Suisse study conducted by Patrick Palfrey, a senior equity strategist at the bank, companies that have outsized stock-based compensation programs have trailed the broader market by 9.2% this year alone.
Tech companies and newly public firms expected to deliver outsized returns have underperformed as the Fed pulls back on years of excess liquidity and seen stocks of these companies fall out of favor with investors who rotated into value stocks as the central bank is in the fight of its life against inflation.
Palfrey’s notes that although the benefits of equity compensation are clear, they also increase a company’s risk profile and add stress in a down market.
In the fiscal and monetary surge during the pandemic, companies that used stock-based pay to lure and retain talent at the promise of substantial upside in their stock prices have now seen many of their lofty valuations fall back down to earth.
With U.S. inflation running white hot, bets on future growth have been scaled back as the Fed increases interest rates,
But prospective and existing employees negotiating packages and promotions should do well to note that even if the current market slump turns into a recession, historically growth companies with high-flying stocks have outperformed the benchmark by around 1.8% on average over the past 17 years.
To that end, employees and prospective hires are taking a bet on the long-term growth prospects of their employers and the ability to convert growth into earnings.
Lower stock prices now also mean that more generous stock packages can be negotiated, given the depressed equity prices, on the assumption that the Fed won’t raise rates indefinitely.
