Amazon.com gives out “restricted stock units” to employees every year, after they’ve worked there for a certain number of years. Based on news stories* I’ve read this is becoming common with young companies, especially ones in the tech-sector.
Where does the company get these stocks from? Do they just keep a large pool of shares specifically for this purchase? Or is there some standard procedure where a company can continually produce shares of stock?
I’ve glanced at Amazon’s shareholder report, and these awards are listed in their expenses section. The awards are handled/held by Morgan Stanley, their value rises and falls, and they appear to be fully sellable.
To prevent confusion, these aren’t stock options. The shares are granted on the anniversary of your hiring (technically, at a specified date in the month of the anniversary), and are immediately sellable (subject to Morgan Stanley’s limitations and waiting periods).
Yes and yes. Most large companies hold a considerable amount of their own stock on hand. I wouldn’t call it a “large pool”, in relation to the overall number of outstanding shares it’s likely a very very small percentage. (Amazon has a $567 billion market cap - 0.1% of that is $567 million.) A lot of the tech companies have also been keeping a lot of cash on hand - they could just go out and buy shares as needed on the open market.
If push came to shove, they could issue more stock. That wouldn’t really make the shareholders happy, as it dilutes their shares.
Often the company will have had a shareholder vote to authorize the issuance of additional shares. So they come out of nowhere in a sense. Or they come from a pool of authorized but yet unissued shares.
They will also have authorized but unissued shares to cover things like the exercise of warrants, but not CBOE options, or the conversion of convertible bonds or preferred.
Sometimes companies might buy shares in the market and hold them as Treasury stock then give these out. This is less common I believe.
Most shares issued to employees or executives are fairly trivial amounts compared to a company’s total share value (otherwise, there would be a shareholder revolt - because that amount could be dividends, or because the stock price is too low.) It’s either pretty good money for a small number of higher ups, or a moderate amount of money to the greater unwashed masses of employees. Most companies do buy back shares occasionally. This also helps guarantee market liquidity for their shares - someone is buying or selling them. So they would take the employee bonus shares from the pool of company held stock. Creating new stock IIRC (IANAStockbroker) is a significantly weighty task that it’s not usually done as an annual “by the way - more stock today” thing. Usually it is done to indicate significant expansion of the company (I.e. we will create and sell 100,000 more shares so as to finance the new factory in Shanghai.) More typically, shares that get too expensive are “split” - everyone who has a share gets two shiny new shares for their one old share. That makes it easier for people to buy and sell. A lot more takers for a $100 share (or block of them) than for a $4,000 share. Also means that Sally in Receivables can be given 5 shares as a bonus, instead of one - and still costs the company less. (Even though they are shares, they still have to be accounted for when bought or sold at current fair market value. )
No need to do that. Most of the time, the company can create shares and hold them as treasury stock whenever they do a share offering. This is a good idea even if you aren’t planning to give them away to your employees; it gives you a valuable currency to leverage if your share price should rise, or a means of quickly raising new capital if you need it.
As noted above, creating new stock dilutes the value of existing shares, and wouldn’t go down well with investors. I know that my employer announced a share purchasing program to the market this year to increase their internal stock holdings which are (partially) used to fund Restricted Stock Units and the Employee Stock Purchase Program.
The term Restricted Stock Units (RSU) means that the shares are not immediately supplied to the employee - they will be granted with a vesting period (something like quarterly periods over two years). Continued vesting is contingent on continued employment (with conditions for retirement/redundancy). This provides a motivation for a valued employee to remain in the company.
Employee Stock Purchase Programs (ESPP) allow staff to sacrifice earnings to purchase company stock, usually at a discount and often with additional favorable conditions (such as the stock price being set at the lower price of the beginning or the end of the enrollment period). ESPP enrollment periods are longer periods of time (6 months is typical). For the company, there is a immediate cash flow saving on salaries/wages, and staff are again further invested in the ongoing performance of the company. However, once the enrollment period closes and the shares are allocated, there are no further restrictions on the shares, and the employee can sell them immediately to gain the value of whatever discount the company sold the shares at, plus the growth in the values of the shares over the specified buy price (all less whatever income or capital gains tax is payable on those gains).
It’s pretty much the same here and, I suspect, in most countries. My late father-in-law worked for a company that allowed employees to purchase shares on a salary sacrifice scheme. It was not a big amount each month and he pretty much forgot about it. Twenty years later, when he retired, he got a letter telling him how many shares he owned; we looked at the share price and it added up to a significant sum, especially as the value had shot up in recent weeks due to takeover rumours. He sold the lot and converted it into an annuity. A few weeks later the potential buyer pulled out and the share price collapsed.
In the financial industry, this would be called an equity forward contract: an agreement to purchase a stock at a future date at a predetermined price (if the employees pay nothing, then the price is zero).
I suspect a sophisticated corporation like Amazon is just buying equity forwards from Morgan Stanley and then it’s up to MS to deliver the shares (presumably by buying them on the market). I know for a fact that the financial institution I work for has equity forwards with other firms that are related to employee compensation packages, but I don’t know if Amazon is one of them.
Don’t let the date fool you. The plan has been updated and amended from time to time and this is the current version. They incorporate this version by reference into their latest financial disclosures.
“Authorized and unissued shares” are shares that the Board of Directors have authorized the company to issue but which the company hasn’t issued yet. When these shares are given to the employees under the stock incentive program, they will be newly-created shares and they will contribute to “dilution.” That means that the employees receiving them get a stake in the company but all the other shareholders positions are “diluted” because they now have a correspondingly smaller stake in the company. Amazon does not have the spend any money to issue shares that were previously authorized, so this can help to preserve their cash but Amazon might not want to do it because they don’t want to dilute the value of their existing shares.
“Shares now held or subsequently acquired by the Company as treasury shares” are shares of stock that Amazon already issued and which they chose to buy back. The “issued shares” includes all the stock they gave to employees, all the stock they sold to early investors before they went public, and all the stock that they sold in IPOs or secondary offerings. Amazon could choose to repurchase these shares on the stock market or in private transactions with large shareholders. Any time a company buys its own stock back, the shares it receives are referred to as “treasury stock.”
Technically, selling treasury stock also contributes to dilution but it is offset by the concentration that occurred when the company bought the shares. For example, if Amazon buys one million shares in the public market and then gives those one million shares to employees in the same financial quarter, the number of Amazon shares outstanding stays exactly the same. There will have been no dilution effect to these offsetting transactions. Amazon will have to spend cash to buy the shares though.
Thanks, all. I was assuming that the constant outflow of shares to employees means they would run out eventually. But if they’re buying some back every year it would easy enough to make the two flows (roughly) balance out.
In financial reporting, the company will generally report their earnings per share (EPS) both in absolute terms of number of shares outstanding, as well as Diluted EPS, which takes into account the effect of all shares that the company might be obliged to issue to meet the requirements of contracts that they have entered into. It doesn’t necessarily just change the denominator, as if the contracts are in-the-money stock options, the extra funds received from the exercise of those options would taken into consideration (and this is done by assuming the company uses the funds to buy back their stock on the market, and thus one would only add to the denominator the net effect of the two hypothetical transactions). If the stock options are out-of-the-money, then they are not dilutive and are ignored. If the contracts are convertible bonds, you have to take into account the interest that they would save on the bonds, as well as the impact of that reduction of deductible interest would be on their income taxes. If the contracts are convertible preferred stock, then it’s like bonds except the dividends saved have no effect on taxes. If they are simply employees having blocks of restricted stock fully vest, then they would simply add to the denominator. Very fun problems in accounting class for someone coming from a math background compared to memorizing disclosure rules.
The 10-K report for any company will have this information if applicable.