Once Again Poor Decisions Trump Good Intentions

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The technology industry has set the standard for start-ups and early stage companies by providing the first group of employees, often consisting of those who helped to make the founders’ ideas into reality, with the opportunity to become millionaires when those ideas actually become a profitable reality.

The technology industry has set the standard for start-ups and early stage companies by providing the first group of employees, often consisting of those who helped to make the founders’ ideas into reality, with the opportunity to become millionaires when those ideas actually become a profitable reality. As many early stage companies are cash starved, they often provide ownership shares in lieu of cash compensation. It’s a simple and well-accepted principle that those who contribute with sweat equity, at the expense of their own wages, deserve to share the wealth, when and if it actually happens.

The media recently reported that Zynga, while preparing for its Initial Public Offering (IPO), realized that it had granted too many stock options, and was demanding to get it back from "underperforming" employees, or risk being fired! While there appears to be a multitude of issues here, specifically why staff that may not have been contributing continued in employment, the issue remains that some of these employees may have taken below-market base compensation and worked hard, with the hope that the ground-floor opportunity would pay off in the form of long-term wealth accumulation through the use of stock options. So much for the traditions behind issuing stock options in the first place!

In addition to setting a very poor precedent, we expect that this will have a hugely negative impact on top management’s credibility and its ability to attract and retain top talent in the future. We also believe that we haven’t heard the last of this issue, which is probably going to result in some ugly litigation.

Most importantly, we believe that this situation provides a great example of what not to do, and an opportunity to learn from this experience. All long-term incentives, whether they include real equity, phantom stock, or other types of cash-based plans, are intended to provide participants with the opportunity to share in a company’s growth and financial good fortunes. The four (4) key lessons from Zynga’s mistakes are:

1.    Don’t make commitments that you can’t or may not be willing to own up to.
2.    Think carefully of all future ramifications, including the “Law of Unintended Consequences”.
3.    Preserve the right to make changes in the future, as situations demand; however, NEVER take away something that has already been granted or awarded.
4.    Remember that good intentions have a way of becoming nightmares, when they are not carefully and thoroughly thought out beforehand.

About Compensation Resources, Inc. (CRI): CRI provides compensation and human resource consulting services to mid- and small-cap public companies, private, family-owned, and closely-held firms, as well as not-for-profit organizations. CRI specializes in executive compensation, sales compensation, pay-for-performance and incentive compensation, performance management programs, and expert witness services.

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Paul Dorf

Andy Sellers
Compensation Resources, Inc.
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