The NASPP Blog

2011 has been a year of many things, one being fresh signs of life in the dormant IPO market. One anxiously anticipated IPO on the radar is that of Zynga, the Silicon Valley based online game company. With rumblings of an imminent high value IPO, Zynga is certainly a hot employment ticket. So imagine the surprise when along came last week’s article in the Wall Street Journal that depicted Zynga as a company that gives and then takes away.

What’s the Fuss?
The issue at hand? Employee stock options. Who would have thought that plain old vanilla stock options would become the heart of a controversy? Well, yes, equity compensation has had its share of scandals (ah, but backdating is so 2006). However, this time is different. No one has been arrested, the SEC is not involved, and it appears, by nearly all counts, to be a situation that didn’t violate the law. So what happened?

Pony Up Your Options, or Else!
According to the Wall Street Journal and several follow up articles, Zynga reportedly wanted to avoid a “Google Chef” scenario in which an employee’s stock option gains upon IPO were disproportionate to his contributions and role within the company (the rumor is that a chef at Google made an estimated $20 million upon its IPO from the value of his stock options). In evaluating and re-evaluating employee performance, Zynga CEO, Mark Pincus, reportedly kept a list of employees whom he felt were over-compensated with equity, based upon their current role and contribution to the organization. As Zynga began to feel pressure on its share reserves and an obligation to shareholders to suppress dilution, employees who had been identified as over-compensated were approached and asked to agree to cancel the unvested portion of their stock options. This would allow the cancelled shares to be returned to the plan reserve and become available for future issuance to other employees. The catch? If the unvested options weren’t returned for cancellation, the employee would be fired. Ouch. Many wondered, is that possible? Is it even legal? Though not tested in the courts, the consensus seems to be ‘apparently so’.

What’s the Answer?
A key public opinion question is whether Zynga was justified in its actions. On one side of the argument lies the assertion that Mr. Pincus did what was necessary to fairly balance the load of wealth within the company. After all, compensation is frequently re-negotiated in companies, including pay reductions. The counterargument is that once given, a benefit should not be taken away. If the targeted employees really weren’t performing well, then why were they still around in the first place? Finally, the company could have avoided this situation altogether if it had considered attaching performance metrics to option vesting.

Having worked for companies whose successful IPOs created employee wealth, I can relate to both sides of the situation. Should a stock option with service vesting be an entitlement once granted (assuming the employee remains employed), even if the employee is under-performing, demoted or reassigned? This is a tough question to answer. I do give credit to Zynga for thinking outside the box in finding a solution, right or wrong.

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– Jennifer