One lesson from the Zynga stock scandal

CNET.com reported a few days ago on an article from the Wall Street Journal about Zynga, the company that created Farmville, the famous game that everyone seems to be playing on Facebook. It seems that in view of their planned IPO (they are due to go to the stock exchange in the coming days),  some employees, apparently considered to be less worthy than initially believed, were threatened to renounce their unvested stock, or else they get fired.

It is usual for start-ups like Zynga to give a low salary and grant some stock in the company to their employees. This allows the start-up to save on cash, and it gives the employees, especially the first ones to join, the chance to share in the wealth should the start-up be successful and go to IPO with a positive take-up by investors. This kind of approach is what Silicon Valley has been built on : motivated, engaged employees, making very little money initially, but living the dream, and thanks to the force of their collective passion, hitting the big time through a great idea/product that goes public and makes them all rich through the stock they received when they joined the company. It’s part of the dream, and of the risk, of working for a start-up.

In response, this article from Fortune/CNN Money makes the point that the Wall Street Journal may be mistaken and that “what Zynga did may sound bad on newspaper, but is little more than morally-acceptable business as unusual“. Their view is that instead of firing under-performing employees, Zynga’s CEO Mark Pincus simply decided to re-assign them to more suitable roles and reduce their compensation accordingly. You should also read the comments as there are some interesting interactions there.

Beyond the reactions on “is it legal ?” or “this is morally wrong”, there is also an excellent comment from a reader “Commonest Man” on Mashable who highlights why the doing is wrong regardless of legalese : “The consequence of what Mark Pincus has done with this move is exactly what happens when companies like Goldman Sachs break the trust with their customers even if it seems to make intellectual sense – the wronged parties make it difficult to make the next set of transactions or contracts requiring much more guarantees in writing and/or not making those transactions.” He basically makes the point that once the trust is broken, it affects not just your company but your whole industry as people in other companies tend to asume that this perceived wrong/abuse could happen to them as well… even in an unrelated organisation.

For me, it is too early to understand what is really going on at Zynga, however one thing is for sure. Whether it is justifiable from a business and/or legal standpoint or not, taking back something that was granted to an employee as part of their contract, months or even years ago, will always create bad publicity for the organisation. If it were cash or a bonus, Zynga would never have thought of saying to some of their employees to pay it back because now their performance is less than what was expected of them.

Stock options are part of the package in start-ups, with low salary and a chance of becoming rich if things turn out well. The “Google chef” did not steal his cash, and for him to realise his stock did not make the company lose any money. The company should be happy to have employees that are millionaires, it means it is successful. And the company reasoning seems weird especially as I am not aware of any clear explanation from Zynga at the time of this writing….

This “buzz” of negative publicity could happen to your organisation not only about equity compensation, but about any and all elements of pay. When have to reduce pay or some elements of pay you therefore need to have a change plan and a proper grandfathering of the situation.

For example change only for new joiners (as most companies do when moving from Defined Benefit to Defined Contribution pensions). Apply the same solution to all employees, not just some of them. Lead from the top and make the senior team sacrifice more than the “average” employee. Communicate the reasons and ensure there is, if not buy-in, at least understanding of what you are trying to achive, why and how.

With the global crisis, one company that I know of in the UK sent emails from the CEO explaining the situation and asking for people to volunteer to a temporary base pay cut in order to avoid making some redundancies. They communicated the percentage of employees who accepted the deal (including more severe pay cuts at the top of the organisation), demonstrated how many jobs were saved, and 9 months later once they were out the storm, reverted to previous pay. This pay cut was taken after other cost control measures had been taken in the organisation.

The retention in that organisation was largely unaffected by the crisis. People did not leave the company. They did not enjoy the pay cut, but they held on to their jobs and did their best because they appreciated being given an alternative, and the fact that everybody was in the same boat. They maintained trust in their leadership and felt they were all part of the effort to save the company and its employees. This is an organisation which, through a smart move from top management, great communication and reall attention to its staff, has gained a lot of human capital – in the next crisis, employees will remember it and remain loyal to their company, helping it to weather the storm.

If you don’t proactively manage this change and communicate, you will end up having a PR disaster on your hands. Whether legal or not, business sense or not, what matters is how your actions will be perceived by the majority of people and by the business community. Without the proper efforts and communication from your side, the reputation of your company could be seriously damaged outside, resulting in financial loss. Your employees will be at best distracted, at worse demotivated and disengaged. Your staff will lose trust in you and will not produce  much discretionary effort, making your company less competitive.You will lose some of your best talent as they will prefer to seek the greener grass on the other side of the fence… I am sure that headhunters specialised in high tech are having a blast at the moment targeting Zynga employees !

And in the worst case scenario, if all hell breaks loose like in the Zynga stock scandal, be ready with a good PR firm by your side in order to do as much damage control as possible…. because you will need it.

Did you ever have to cut back the pay of some employees ? How did you handle it ? How did the staff react to it ? Please share your experience in the comments section !

Related post :

A follow-up on Zynga

Print Friendly, PDF & Email
Share the Knowledge !
Get Free Updates

Comments

  1. Great post and great blog, Sandrine!
    I really like the style and the way you are popularising a subject that could be thought to be dry for some (well not for me, obviously!) and make it lively and interesting by explaining the underlying implications of some bad reward decisions.
    I will follow this Zynga story very closely as I am amazed at how a company can even entertain doing such a damaging thing for their employees’ morale, motivation, engagement and loyalty and eventually jeopardizing their own future.

    Keep up the good work and glad to see some real life examples to ilustrate what wonders good communication can do 😉

    • Merci Soraya ! When I read about this Zynga story I was appalled and thought that even though a lot of companies don’t have equity compensation in the GCC, they have multiple elements of pay and if they need to reduce one or some of them, they should have a plan to communicate and get understanding from employees. No-one knows that better than you given your past experience 🙂 !

Speak Your Mind

*