Microsoft's purchase of LinkedIn for $26.2 billion was big news, but The New York Times has theorized a non-public reason for the sale: LinkedIn's compensation problems.

It seems that LinkedIn gave a huge percentage of its compensation in stock. While many people enjoy this-if the company you work for does well, you can have a sweet retirement-if the company does poorly, it can be a huge problem.

That's what happened at LinkedIn. According to the NYT:

On one grim day in early February, LinkedIn's stock price plummeted more than 40 percent after it forecast weaker-than-expected growth for the year. The share price had hovered at $225 at the beginning of 2016; a month later it briefly got close to $100.

You can see why this might be a problem for employee retention. Employees freak out if the don't get a yearly 3 percent increase. You can imagine how top talent isn't willing to stick around in a company that just slashed their compensation.

Every company needs to keep their top employees, and slashing compensation is the best way to get rapid churn. Top level employees always have options-even in a recession. Here are some things to think about when devising a compensation plan for your high-level employees:

Make sure base compensation is sufficient.

Some people may say they want a lot of stock, with the idea that this is how you get rich. This is true-it's the way you can get rich, but it's also the way you can lose your shirt, which can happen when the stock price drops. You need to make sure the base compensation is market rate.

Bonuses should be bonuses.

Everyone loves a good bonus, but they need to make sense in the overall compensation scheme. Sure higher level people can get great bonuses, but the ability to reach them should be realistic and clear. They should be tied to company and individual performance and the conditions for those should be clear.

Stock should not be the primary compensation source.

Stock prices fluctuate. Mortgage payments and student loans do not. Employees need a secure source of income in order to live normal lives. If they were comfortable with fluctuations they'd be far more likely to start their own business than work for yours.

Founders are different.

Sure, when you're founding a business, company stock is the pay of choice, mainly because there isn't any other money available. These people are taking the risks and can reap the rewards.

What if your employees want the risk?

Some people absolutely are willing to trade a guaranteed salary for bonuses and stock. That's great. But consider what will happen if the bonus doesn't happen or the stock price drops. Your founding partners are bound in for several reasons. Your employees aren't and that's problematic for two reasons.

  • If the stock tanks or the bonuses dried up, they are out of there.
  • If the stock skyrockets, they are out of there to live on their private islands.

Make sure that stock that you have is dependent on a reasonable vesting time period. This keeps people around if the stock goes up. It can also keep people around if they are hoping for a rebound.

Regardless, of what you want to do, think about the potential consequences-unless you have Microsoft lined up to buy your business out.

Published on: Jun 17, 2016