Some finance executives are tweaking compensation expenses—including stock-based pay and bonus eligibility—in the latest move among U.S. companies to cut costs from increasingly lean operations as recession concerns grow.
Unity Software Inc.
and business-software firm
are among businesses weighing or moving ahead with bringing down stock-based compensation, while companies such as DSW Designer Shoe Warehouse parent
Designer Brands Inc.
and Facebook owner
Meta Platforms Inc.
are planning adjustments to worker bonuses. Firms like Google are making other trims to the employee experience by eliminating popular perks like snack bars and choosing software and equipment vendors based on cost.
These moves to pare compensation expenses—typically a company’s largest cost—follow a year of corporate retrenchment that has included laying off workers, exiting leases, reducing the number of suppliers, automating tasks and trimming software spending. But the focus on cutting compensation costs is fraught as companies risk driving away top performers, denting employee morale and losing the battle to attract workers in a tight labor market.
Compensation costs could be an attractive area for some finance executives scrambling to hit savings and earnings targets, advisers said. Companies can reduce stock-based compensation by lowering the eligibility to, for example, just senior vice presidents and above. They can also give lower grant sizes to that same group or revise the plan design to add in provisions that lower the expense.
“If the economy continues to slow, it’s absolutely a lever that companies are going to take advantage of,” said Terry Adamson, a partner at Infinite Equity, a consulting firm specializing in stock-based pay. “Stock-comp expense is one of those things that you can do to manage bottom-line expense and still hit your profitability goals.”
Taking stock of share-based pay
Unity Software is looking at reducing the number of shares it grants as part of compensation but hasn’t made any decisions yet, Chief Financial Officer
said. The San Francisco-based company, which provides tools for creating videogames and other applications, is considering reducing the number of new shares it grants to its existing employees and offering fewer grants to new hires, Mr. Visoso said.
The company’s share-based compensation was on the “significantly high end” compared with its peers, but it still wants to remain attractive to new and existing employees, Mr. Visoso said. The company, which is navigating weak digital advertising, in January laid off more than 200 of its roughly 8,000 employees and is continuing to look to shrink its total office space, he said, adding that stock compensation is one more avenue the company is considering. “We’re going after cost very, very aggressively,” Mr. Visoso said.
Another San Francisco-based tech business, Salesforce, wants to lower the share of stock-based compensation for the year ending January 2024 compared with a year earlier, to below 9% of its revenue from 10.5%, CFO
said at a conference on March 7. The expense is expected to fall due to a declining impact from prior acquisitions and adjustments being made to its equity program, Ms. Weaver said on an earnings call on March 1.
Any changes to its equity plan have to be done carefully so the company retains workers amid rising competition for talent, Ms. Weaver said. She said it is difficult to make significant changes in stock-based compensation in a single year due to accounting rules requiring the amount to roll out over time. “We need to treat it as an expense; we need to manage it like an expense,” Ms. Weaver said at the conference, referring to stock-based compensation.
Salesforce in January said it was laying off 10% of its roughly 80,000 workers and is working to reduce its real-estate footprint, among other cuts, amid a pullback on customer spending. The company recently hired consultant group Bain & Co. to help it restructure, in part by trimming support staff and trying to expand a self-service model where new customers can sign up for software on their own. Salesforce declined to comment for this article.
Balancing savings and talent retention
These moves to cut compensation, which aren’t yet widespread, mark a reversal of company behavior in the years following the pandemic as companies raised salaries and other benefits in a bid to recruit and retain workers. The U.S. labor force has been shrinking since early 2020, as more baby boomers retire.
Companies early in the pandemic adjusted bonus payouts and targets in response to the uncertainties, said Allison Hoeinghaus, a managing director at professional-services firm Alvarez & Marsal. But those adjustments to performance metric levels, which largely stabilized in 2021 and last year, are starting to creep back into compensation discussions as finance executives are facing a volatile economy, she said. “It’s just kind of a natural time to recalibrate, if you will, those performance metrics, given just the uncertainty and change in the market.”
Designer Brands is adjusting incentive compensation as part of an effort to pare as much spending as possible, said the footwear and accessories maker’s finance chief,
To that end, the target workers have to hit to receive a bonus has been raised, Mr. Poff said, declining to say where the target is now compared with where it was previously.
“That was aligning that bonus to be in line with the fact that it’s a year that’s expected to produce less overall than the prior year,” Mr. Poff said. Designer Brands previously altered the bonus program during the pandemic and during the recession in 2008, the CFO said. “We think it’s something that makes sense and best aligns the actions of management and the company with shareholders in times like this.”
The Columbus, Ohio-based retailer last month said it expects a decline in sales and earnings in fiscal year 2023. Gross profit decreased to roughly $222 million for the quarter ended Jan. 28 compared with $254.2 million a year earlier. The company posted net income of $45.1 million for the quarter compared with $14.4 million in the prior-year period.
‘Maintaining a high-performance culture’
Meta Platforms, meanwhile, said last month that it plans to lower some bonus payouts and review employee performance more frequently, The Wall Street Journal reported, citing an internal memo. The news came as the Menlo Park, Calif.-based company has in recent months looked to cut costs, including by reducing office spaces, cutting travel expenses and announcing multiple rounds of layoffs. The company didn’t respond to a request for comment.
“We understand that while this is a significant change that might disappoint some people, it aligns with our continued focus on maintaining a high-performance culture,” the memo said.
Alvarez & Marsal’s Ms. Hoeinghaus warned the adjustments to bonus performance metrics should come with targets workers can achieve, adding that employee attrition may increase the longer bonuses are more difficult to get.
Limiting performance-based pay cuts, or lifted targets, is crucial to employees’ morale, said
chief financial, strategy and services officer of jewelry retailer
Signet Jewelers Ltd.
The Hamilton, Bermuda-based owner of Kay Jewelers and Jared has in recent years cut hundreds of millions of dollars in expenses by closing stores, getting rid of items the retailer believes customers won’t miss and cutting hours at low-traffic times. In the fiscal year ended Jan. 28, reduced performance-based compensation was one way the company reduced costs, the CFO said, declining to say by how much the payments were reduced. Those payouts have been restored to normal levels for the year ending in January 2024.
“It’s critical for us…to restore it to its normalized level,” Ms. Hilson said of performance-based compensation. “It’s an important part of compensation packages and the competitive nature in retail.”
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