If equity is more expensive than debt, why do companies give out so many RSUs?
Finance 101 tells us that equity is more expensive then debt for any company. If that is true, why are so many companies making RSUs such a big part of employee total compensation? Aren't they better off just giving out larger base salaries and bigger cash bonuses (that could be funded by relatively cheaper corp debt/bonds)? Is Netflix the only company to have figured this out? Is that why they don't give out any RSUs typically? Discuss...
Incentives to make the company grow
Equity retains talent for longer period and increases responsibility since they own part of the company. Basically you’d have talent working continuously to make the company succeed until they can cash out or screw up badly
Companys top priority is maximization of shareholder value. Incenting workforce with rsus aligns priorities.
Incentives and all are decent arguments but the only valid one is: You don't repay equity
You have to stay to get the equity. And companies who are extra "smart" like Amazon backload their equity. 80% is given in last 2 years of initial 4 year package. And average tenure of amazonian is like 1 to 1.5 years. So I got some stock that was regifted 10000 times.
And when the gravy train ends for the company (and it will) it is much easier to adjust tc down by cutting back on RSU grants. Trying to cut someone's base pay is much harder.
Equity is cheaper than cash for income. Stocks are expensed at the grant amount vs. Vest. This allows for higher employee compensation vs. Comp expense
Where did you read that? I've been taught equity vs debt depends on the situation and it takes skilled CFOs to take the correct call. Besides, equity gives a sense of ownership and partnership in the company's growth.
Take a look at this: https://www.investopedia.com/ask/answers/05/debtcheaperthanequity.asp
That investopedia article confirms that the premise of the question is wrong. For risky, growing companies where future profits are uncertain, debt may not be there better choice. For a tiny startup without revenue, you won't be able to borrow millions of dollars to pay engineers, because the interest to make up for the repayment risk would be too high. But you can offer a share of the possible future profits and find investors and workers willing to take the risk. Also current stock market makes equity cheaper for public companies too. You can just say "oh ignore our real results and look at these non-GAAP numbers that don't count all the stock we gave away" and investors will value your company higher than if you paid your workers cash.