How Do You Retain Employees Who Keep Jumping Ship?

The declining valuations of entrepreneurial technology companies in recent months have undoubtedly depressed the venture capitalists who are their funders. Employees who do not receive high salaries, but instead hold shares in the company, are likely to feel equally irritated. The question is whether they will be more tolerant of the employees they leave behind.
There have been some false illusions about Silicon Valley, one of which is that the average employee can fly straight up in a corporate "spaceship" laden with stock options. The significant increase in the value of stock options has been a key factor in maintaining company morale, retention and recruitment.


Twitter is probably the most notorious example. Its share price is 7% below its issue price two years ago and the social media company has replaced almost every key executive position since its IPO. more than a quarter of the company's direct and operating expenses ($526 million) in the first three quarters of 2015 were spent on employee stock compensation, demonstrating the company's reliance on equity-based compensation methods. Several other well-known technology companies have also seen their share prices fall below their not-too-distant issue prices, including GoPro (30% lower), Box (7% lower) and Esty (40% lower). Even late-stage unlisted companies Dropbox and Snapchat have been significantly undervalued by the mutual funds that invested in them.


Employee holdings are usually not protected from price drops, a deal that only venture capitalists can fight for. As a result, they are the worst off when company valuations fall. But while the job market remains red-hot (one venture capitalist said that headhunters were too busy to take his hiring mandates), employee turnover may not yet rise significantly. Michael Morell, founder of California headhunting firm Riviera Partners, says: "There is no mass turnover of talent happening at the moment. In fact, only a small percentage of people have been affected by the drop in valuation - those employees who have been on board for the last six months. The employees are still very wealthy ...... it's the period of getting high returns that has been stretched. However, those guys who are angry at heart are still in a great position."


One reason employees are staying put is that when companies go public, they are no longer paying for riskier private company stock options, but for the more secure and stable "restricted stock". But it may also be that employees of technology companies are not interested in jumping ship for a little higher salary.
In the face of the war for talent, top Silicon Valley companies such as Facebook, Google, Apple and Amazon can still retain employees because they offer stable salaries and additional benefits, such as free meals and subsidies for pregnancy treatment. In addition, the average share price of these four companies has risen by 50% this year. A former HR executive at a large private company described this problem for entrepreneurial companies: "Several of the top Silicon Valley companies, such as Google, actually set the standard for how technical talent should be treated. Generous cash compensation plans, combined with equity that grows with years of experience, can be a deterrent at best and a shackle at worst for employees to leave."
 
When engineers do jump ship, it's not all about the money involved. Money seems to come second, third or even fourth in importance," says headhunter Morell. Money is not the factor that drives employees to jump ship. For many employees, the question is, how attractive is this new company? Firms will have to tell the truth to convince candidates to jump over."
On Wall Street, the money-first culture may also be quietly changing. Entrepreneurial boutique banks continue to spring up all over the place. Founders admit that part of their consideration is the opportunity to keep a larger share of the fees they generate for themselves. But they also say they want to escape the bureaucracy of the big banks.


Private equity firms such as Blackstone have been touting generous maternity leave schemes to attract younger members of the financial industry. Bank management trainee programmes, known for their crazy overtime, are now more benevolent too. Goldman Sachs has also taken steps to "retain our most talented employees for the long term" rather than letting them jump ship to a hedge fund after two years. Today, junior analysts can be promoted directly to higher level associate managers without having to obtain an MBA. Banking, which was traditionally a destination for MBA graduates, has become much less attractive to MBA graduates, so it makes sense to try to retain most junior staff.
 
But even if Saturday nights no longer have to be spent in the office, we don't yet know what Wall Street can do to retain employees who suddenly want to pursue their ambitions.

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