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Shares of Snap (NYSE: SNAP) are trading near an all-time low about a year and a half after going public. Even if you're a long-term buy-and-hold investor who pays no attention to daily or weekly swings in stock prices, the downward trajectory of Snap shares should concern you.
Former chief security officer Jad Boutros pointed out that anybody who's been hired at Snap in the last four years has lost money on their stock grants -- and many new people have since come on board.
Considering Snap relies heavily on stock-based compensation, the falling stock price could have a negative impact on its employee retention. If Snap starts seeing an increase in employee turnover, it could lead to greater inefficiencies in its operations.
What's more, a declining stock price combined with significant stock-based compensation can lead to further share dilution for existing shareholders. That's bad news for everyone with a stake in the company, employee or not.
Image source: Snap.
Stock-based compensation addictions
Snap paid out $2.6 billion in stock-based compensation last year. A lot of that comprised rewards to engineers and other personnel when the company made its IPO.
Even taking a step back in 2018, the company has paid out $289.6 million in stock-based compensation through the first six months of the year. That said, second-quarter stock-based compensation fell to $156.4 million from $245 million last year. The drop in stock-based compensation, however, has more to do with Snap's accounting method combined with the slide in head count than it does with any concerted effort to reduce stock-based compensation.
At its current pace, Snap is on par with the stock-based compensation Twitter (NYSE: TWTR) was paying out in 2016 before it took steps to cut back on stock grants as part of its compensation. Interestingly, Twitter faced the same problem Snap currently faces as its stock price tanked in 2016. The company was able to turn things around by cutting its workforce (a measure Snap has already taken) and reducing its reliance on stock-based compensation. Today, it's reporting profits on a GAAP basis, and stock-based compensation continues to decline.
Many in Snap's workforce received shares last year that vest over several years. The compensation they thought they received is now about half as valuable as it was. That's not great for employee morale.