The Lex Newsletter: how should employees be paid in a downturn?

Dear reader,

The San Francisco Bay Area is uncharacteristically full of rooms to rent. Job cuts in the tech sector are driving people out of the city, leaving behind empty spaces in shared houses. Perhaps paying $500 a month for a “pod” is a living option that has finally worn thin.

Those who remain face a downturn in pay. The sharp drop in tech share prices is hitting stock-based remuneration. The result could be a rise in handouts that ameliorate the impact. Video conferencing company Zoom had almost four times as much unvested stock at the end of 2022 than it did the previous year. But extra share-based remuneration can dilute other investor holdings. Airbnb has opted to buy back shares to offset the dilution. It’s an expensive trend for shareholders either way.

Of course, linking pay to company performance is not limited to tech. Citigroup has chosen to reduce chief executive Jane Fraser’s cash remuneration and increase share awards. Lex still has some questions about the package. Citi’s net income fell 32 per cent last year and the share price has underperformed its peers. Handy, then, that Fraser’s targets are full of non-financial achievements, including changes to the organisational chart.

Racing green

Rolls-Royce has structured the pay of its new leader, Tufan Erginbilgic, so that 30 per cent of his base salary is paid as shares deferred for two years. He has arrived at the engineering company with a turnround plan to lower debt and improve productivity. Since details about the strategic review came out this week, shares are up by almost a fifth.

For one stark example of the gains that might be made, look at sales per employee. In civil aerospace, Rolls-Royce earns $395,000 in revenue per employee. Pratt & Whitney makes half as much again.

Lex sees a credit rating increase in Rolls-Royce’s future. Longer term, the industry focus remains on decarbonising air travel. Carbon prices are rising quickly. Permits given to European factories now cost more than €100 per tonne. That price could be enough to spur changes that cut global emissions in half, according to Goldman Sachs research.

Quarterly instalments 

The sort of strategy overhaul at Rolls-Royce is nowhere to be seen in the flood of fourth-quarter results from companies walking back pandemic-era plans and forecasts. US DIY retailer Home Depot expects flat sales in 2023. Lockdown repairs are over, meaning demand is falling and wages are rising. Demand for Domino’s Pizza deliveries is also ebbing. Pizza fatigue is setting in. High delivery charges and the return of in-restaurant dining have taken their toll. Operating margins are down and like-for-like sales rose less than 1 per cent.

Drug developers also cannot sustain their pandemic productivity gains. The cost of drug development at the largest pharma companies rose 15 per cent last year and sales are down.

Still, Lex points out that calculating the impact of development is tricky. Drugs can take a long time to generate profits.

Crypto spring, Russian winter 

Crypto may be the ultimate pandemic-era investment folly. About $1tn was erased last year as scandals and scams deterred retail and institutional investors. Interest rate rises have neutered demand for risky trades.

Crypto exchange Coinbase joined markets in April 2021 in a direct listing that was perfectly timed with rising prices for digital tokens. The company’s share price crunch since then is even worse than the drop in bitcoin’s price.

There is one bright spot on the horizon. Demand for subscriptions to Coinbase One, which lets users trade for free, as well as services such as staking, are higher than ever. Revenue here rose a third in the last quarter of 2022. Consensus forecasts expect this to keep on rising, along with assets on the platform. That is if the existential threat of regulatory crackdowns does not occur.

Here in Europe, the anniversary of Russia’s invasion of Ukraine has led to greater reflection on the impact of financial action taken against the country. Germany has vowed to crack down on companies that dodge sanctions and the US Treasury’s Office of Foreign Assets Control is asking questions about Austrian bank Raiffeisen’s Russian operations — a source of large profits.

Raiffeisen’s decision to cling to its Russian business has caused reputational damage that cannot be repaired. Shares trade at less than a third of book value. We do not see much chance of improvement.

Border order

Apple’s decision to work with Chinese supplier Luxshare for its new augmented reality headsets marks a first, Lex says. It illustrates both the improving quality of local Chinese suppliers and Apple’s growing sales within the country. Apple’s market share in China is still growing. It had 22 per cent of the smartphone market in the final three months of the year, pushing Vivo down to second place, according to data from Counterpoint.

Apple is facilitating other cross-border interactions too. Chinese retailer Temu, the US-based subsidiary of PDD, became the top shopping app in Apple’s US app store when it launched last year. PDD’s growing base of global customers is helping it to outshine rival Alibaba. But western regulators’ concerns about data collection by Chinese companies are rising. This week, the European Commission banned TikTok from official devices. It is not a stretch to imagine that shopping apps might be next.

Other things I liked this week 

Lex takes a look at UK banks and the complexity of impairments for our Weekend Populi column.

I loved this chatty and quite gross diary for the London Review of Books from Patricia Lockwood, author of the novel No One Is Talking About This, about plane rides, illness and jacaranda.

I also liked this Eater article on dumplings, which is an investigation into Los Angeles’ famous lack of a city centre and the importance of malls.

Meanwhile, Google claims to have reached a quantum milestone. A lot of FT readers were curious as to why tech’s vision of the future so often focuses on Mars and quantum computing rather than carbon neutrality and longevity. Me too.

Enjoy your weekend,

Elaine Moore
Deputy head of Lex