it's no secret that CEOs are paid it really well but in most cases the vast majority if not
their entire compensation is paid out in stock for instance sundar Pichai gets 242 million dollars in
compensation per year but only two million dollars of that is in cash or less than a 1% of course
that's a great cash salary but nowhere near his total compensation so when he is looking to sell
how would he go about selling billions of dollars worth of stock without crashing off that stock
well starting off companies and their founders are well aware of this issue and this is why the
user process of stock vesting it's not to CEOs and high-level executives they need to consider
thousands of engineers and managers can cost just as much damage oftentimes engineers and managers
are offered stock bonuses of ten to twenty thousand dollars and over several years these
guys generally rack up stock holdings well into six figures going back to Google as an example
they have over ninety eight thousand employees of which most are well-paid managers and engineers
alphabets median salary itself is two hundred and forty six thousand dollars so we can assume that
most of their employees do get stock compensation so even if just ten percent of their workforce
decides to cash out this could mean billions of dollars of stock reaching the market and this is
where stock vesting comes into play stock vesting is basically a restriction to selling stock too
quickly there are two main types of stock vesting which are time-based vesting and milestone based
vesting time-based vesting is the most common type used by companies time-based vesting is
essentially what it sounds like companies set a minimum time requirement before an employee is
actually able to sell the stock and this is also generally contingent on employees still working
at the company at the time for the average employee and management this is usually just
one year however for CEOs and executives the time period is generally four to five years companies
basically divide the total stock compensation by the vesting time and create what is known
as a vesting cliff this is just a graph that showcases when employees are actually able to sell
their stock and how much of it if one is to resign during this window they will not get the remainder
of the stock as this will be reclaimed by the company so whenever you see a CEOs compensation
that is generally what they will realize over the next four to five years if they stick with
the company and what they are currently realizing is an average of what they were earning the past
four to five years moving on let's take a look at milestone based fasting this is essentially
the same thing as time-based vesting but instead of the goal being a time period is generally a
market cap for instance Apple could tell Tim Cook that he can't sell his shares until Apple's worth
two trillion dollars and finally we have hybrid vesting which is a combination of both time-based
vesting and Malcolm base vesting but what is even the purpose of vesting periods employees that have
been working at a company for several years can still cause damage by selling pick volumes and
this is especially a threat when companies are on downfall well the thing is the vesting time
is more for the company rather than employees the vesting time period isn't built to prevent
employees from selling shares too early but rather give companies a time to be able to afford to buy
them back for big companies the vesting period is not that big of a deal because they already
have large cash reserves ready to buy back stock for instance alphabets net income last year was
thirty four point five billion dollars so even if sundar pichai were able to sell his entire
240 million dollar compensation every year which he can't but even if he could alphabet could buy
it back for a decimal value of their net income and this is how companies prevent executives and
employees from selling billions of dollars worth of stock and crashing the stock price companies
simply buy back the stock under the company's name during periods in which many employees are
cashing out and then they turn around and hand the stock to next CEO or next employee or even
the same person the following year so a vesting takes care of basically 99.9 percent of the market
but there's still a handful of individuals left to deal with core founders / founder CEOs people like
Sergey Brin Larry Page Elon Musk Bill Gates and Jeff Bezos the thing is these guys are founders
and they usually care about the well-being of the company very much so they only liquidate as much
as they need and limit it to well below how much the market can handle and/or how much the company
can buy back for instance Jeff Bezos liquidates 1 billion dollars worth of Amazon stock per year
to fund a space company Blue Origin and since Amazon is worth over 1 trillion dollars this is
less than 0.1% and doesn't harm stock price but yes at this rate he would tell Jeff Bezos well
over 100 years to liquidate his position a great example of this is Bill Gates he's been selling
off his shares since 1986 at which point he owned 45% of Microsoft down to 1% today 1%
is still worth over 10 billion dollars today but currently Bill Gates is within 10 years of being
able to sell off his entire Microsoft Holding of course I don't think yours maximizing how much he
could sell off every single year but nonetheless for most founders selling their entire stake
would mean decades of selling if they want avoid hurting stock prices so most founders will never
be able to realize their full wealth within our lifetime but this doesn't really matter as they
can liquidate more than they could spend anyways that's most founders there are some loose cannons
though that just liquidate their entire stake in a matter of weeks for instance Steve Jobs sold his
entire 11 percent stake other than one share in a fit of anger in 1985 after he was fired from his
own company more recently ubers co-founder Travis kalanick sold a 2.5 billion dollars worth or 90%
of a stake in just six weeks at the end of 2019 he was also author like Steve Jobs quite recently
anyways generally companies placed vesting tabs on stocks in order to grow enough capital to offset
employees an executive selling off stock founders on the other hand can cause serious damage but
they understandably don't intend to except for some unique situations in such scenarios
there's up to two other large stakeholders to buy up as much as they can to minimize the
repercussions of large-scale liquidation but hey maybe they should have thought about that
before Alice ting a founder if you guys thought this video thoroughly explained how companies
prevent devaluation from too much liquidation they major drop a like and consider subscribers
see more questions logically but until then I'm Hardy and I'll see you guys on the next one