Harvard Case - Stock-Based Compensation at Twitter
"Stock-Based Compensation at Twitter" Harvard business case study is written by Jonas Heese, Zeya Yang, Mike Young. It deals with the challenges in the field of Accounting. The case study is 27 page(s) long and it was first published on : Oct 12, 2018
At Fern Fort University, we recommend that Twitter implement a comprehensive review of its stock-based compensation program, considering its impact on financial performance, employee motivation, and long-term sustainability. This review should encompass a thorough cost analysis, an assessment of the program's effectiveness in attracting and retaining talent, and an evaluation of its alignment with the company's overall strategic goals. Based on this analysis, Twitter should consider adjustments to the program's structure, vesting schedule, and performance metrics to optimize its impact and ensure long-term value creation.
2. Background
The case study focuses on Twitter's stock-based compensation program, a significant component of employee compensation. The program, designed to attract and retain top talent, involves granting employees stock options and restricted stock units (RSUs). However, the program's effectiveness and its impact on Twitter's financial performance have come under scrutiny. The case highlights concerns about the program's high cost, potential dilution of shareholder value, and its influence on short-term decision-making.
The main protagonists in the case are the Twitter executives, including the CEO, who are responsible for setting the company's strategic direction and overseeing the stock-based compensation program. The case also explores the perspectives of shareholders, who are concerned about the program's impact on their investments, and employees, who are motivated by the potential financial rewards offered through the program.
3. Analysis of the Case Study
The case study can be analyzed through the lens of several frameworks, including:
- Financial Analysis: A critical aspect of the case is the financial impact of the stock-based compensation program. This involves analyzing the program's cost, its impact on earnings per share, and its potential dilution of shareholder value. Twitter's financial statements, including its income statement, balance sheet, and cash flow statement, provide valuable insights into the program's financial implications.
- Employee Incentives: The case study explores the effectiveness of stock-based compensation in motivating employees. Analyzing the program's structure, vesting schedule, and performance metrics helps determine its effectiveness in aligning employee incentives with the company's strategic goals.
- Corporate Governance: The case study raises concerns about the potential influence of the stock-based compensation program on short-term decision-making. This necessitates an evaluation of the program's alignment with Twitter's corporate governance principles and its impact on the company's long-term sustainability.
- Strategic Analysis: The case study highlights the importance of aligning the stock-based compensation program with Twitter's overall strategic goals. This involves analyzing the program's role in attracting and retaining talent, fostering innovation, and driving business growth.
4. Recommendations
Based on the analysis, we recommend the following actions:
- Conduct a Comprehensive Cost Analysis: Twitter should conduct a thorough cost analysis of its stock-based compensation program. This analysis should utilize activity-based costing to accurately allocate costs associated with the program to specific activities and departments. This will provide a clear understanding of the program's true cost and its impact on profitability.
- Assess the Program's Effectiveness: Twitter should conduct a comprehensive assessment of the stock-based compensation program's effectiveness in attracting and retaining talent. This assessment should involve surveying employees, analyzing employee turnover rates, and comparing compensation levels with competitors.
- Align the Program with Strategic Goals: Twitter should ensure that its stock-based compensation program is aligned with its overall strategic goals. This involves reviewing the program's structure, vesting schedule, and performance metrics to ensure they incentivize behaviors that support the company's long-term success.
- Consider Program Adjustments: Based on the cost analysis and effectiveness assessment, Twitter should consider adjustments to its stock-based compensation program. These adjustments could include modifying the vesting schedule, introducing performance-based metrics, or exploring alternative forms of compensation.
- Enhance Corporate Governance: Twitter should strengthen its corporate governance practices to mitigate the potential for the stock-based compensation program to influence short-term decision-making. This could involve establishing independent compensation committees, implementing stricter disclosure requirements, and promoting a long-term perspective among executives.
5. Basis of Recommendations
These recommendations are grounded in the following considerations:
- Core Competencies and Consistency with Mission: The recommendations prioritize attracting and retaining top talent, which is a core competency for Twitter. The adjustments to the stock-based compensation program aim to align employee incentives with the company's mission of connecting people and fostering global conversations.
- External Customers and Internal Clients: The recommendations aim to ensure that the stock-based compensation program does not negatively impact Twitter's ability to attract and retain customers and employees. By optimizing the program's cost and effectiveness, the recommendations aim to foster a sustainable and competitive environment.
- Competitors: The recommendations consider the competitive landscape in the technology industry. By analyzing competitor compensation practices, Twitter can ensure its program remains competitive in attracting and retaining top talent.
- Attractiveness ' Quantitative Measures: The recommendations are based on quantitative measures, including cost analysis, employee turnover rates, and financial performance metrics. These measures provide objective data to support the proposed adjustments to the stock-based compensation program.
6. Conclusion
Twitter's stock-based compensation program, while intended to attract and retain talent, requires a comprehensive review to ensure its long-term effectiveness and sustainability. By conducting a thorough cost analysis, assessing the program's effectiveness, and aligning it with strategic goals, Twitter can optimize its impact on financial performance, employee motivation, and shareholder value.
7. Discussion
Other alternatives not selected include:
- Eliminating the stock-based compensation program: This option would significantly reduce costs but could negatively impact employee motivation and the company's ability to attract and retain top talent.
- Maintaining the current program: This option would maintain the status quo but could lead to continued concerns about cost, dilution, and short-term decision-making.
The key assumption underlying the recommendations is that a well-designed and managed stock-based compensation program can be an effective tool for attracting and retaining talent while also promoting long-term value creation.
8. Next Steps
To implement these recommendations, Twitter should take the following steps:
- Phase 1 (3 months): Conduct a comprehensive cost analysis and effectiveness assessment of the current stock-based compensation program.
- Phase 2 (6 months): Develop a revised stock-based compensation program based on the analysis and recommendations.
- Phase 3 (12 months): Implement the revised program and monitor its impact on financial performance, employee motivation, and shareholder value.
By taking these steps, Twitter can ensure its stock-based compensation program remains a valuable tool for attracting and retaining top talent while also promoting long-term value creation for its shareholders.
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Case Description
Olivia Nash, an analyst at leading hedge fund BlueShark Capital Management, had just finished listening to the hour-long earnings call for Twitter's Q4 2017 results. Was Twitter doing well? That depended on which numbers she chose to believe. According to Generally Accepted Accounting Principles (GAAP), Twitter had recorded a $108M net loss for 2017. But on the earnings call, CEO Jack Dorsey and CFO Ned Segal had emphasized a slightly different and much better-looking metric: non-GAAP net income of $329M. This adjusted version of net income was a measure Twitter had defined itself when it first went public in 2013. The biggest difference between the two was that Twitter's non-GAAP net income stripped out stock-based compensation expense. Olivia couldn't help but wonder: Was stock-based compensation a true expense? Why did analysts and even regulators condone non-GAAP metrics? And, most importantly, how did the reporting of these metrics impact Twitter's profitability and the way the company was managed?
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