Tech Workers: Activist Investors May Be Coming for Your Equity Compensation

In 2021—the early days of the current bull market—many software companies’ trading multiples seemed untethered from reality. At the time, however, very few shareholders complained that 15%, 20%, or even 25% of annual revenues were being paid out to company employees in stock-based compensation.  

Equity grants were framed as a necessary cost of attracting top engineering talent, and buybacks designed to offset dilution were described as a sensible allocation of capital. But as the air has come out of many high-growth software names, and concerns mount that generative AI could commoditize swaths of traditional enterprise software, patience is wearing thin among the investor class. 

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For years, during earnings presentations, many software companies highlighted non-GAAP metrics that excluded stock-based compensation. The logic was that while stock-based compensation is an expense under traditional accounting rules, it does not represent an immediate cash outflow. Therefore, it should not detract from a company’s underlying operating performance. 

But that framing obscures an important second piece of the puzzle. To prevent ongoing dilution from quarterly or semi-annual equity grants, many companies use a substantial portion of their free cash flow to buy back shares in the open market. In effect, they are converting what looks like a non-cash expense into a very real one. 

With stocks trading well below their recent highs, investors are no longer content treating stock-based compensation as a harmless accounting add-back. They are beginning to see it as a real expense, whether it is paid in equity rather than cash. And if the push to rein in equity grants accelerates, as activist investors circle companies that have fallen from grace the furthest, it will reshape the financial lives of the employees who now rely on those grants as a cornerstone of their compensation. 

For example, a company may report $1 billion in free cash flow. But if $600 million of that is spent repurchasing shares to offset dilution from employee grants, only $400 million remains to either reinvest into future company growth or return capital to shareholders.  

As long as revenue growth was robust and stock prices were rising, this dynamic attracted little scrutiny. Today, with growth slowing and AI threatening to compress margins, investors are asking whether those buybacks represent a misallocation of capital. And if activists begin demanding that companies cap stock-based compensation or redirect buyback dollars toward growth initiatives, employees may find that their annual refresh grants shrink or that vesting schedules become less generous. 

For senior leaders especially, equity compensation is not a bonus; it is effectively the paycheck. At the director or officer level, the compensation mix often flips dramatically from what most industry outsiders imagine.  

A senior executive might earn $300,000 in base salary but receive another $700,000 or more in the form of restricted stock units (RSUs) and performance stock units (PSUs). In many cases, substantially more than half of total compensation is tied directly to equity awards. 

That structure works beautifully in a rising market where shares are appreciating, and performance targets are being met without fail. However, if boards come under pressure to reduce stock-based compensation as a percentage of revenue, senior leaders are likely to feel the impact first and most severely.  

Grants for employees further down the organizational chart may shrink incrementally. Conversely, grants to the leadership team are large enough to move the needle when it comes to dilution, and trimming them meaningfully improves the overall optics around capital discipline. 

The psychological impact should not be underestimated. Many senior leaders mentally anchor their lifestyle to “target compensation” instead of base salary. In reality, only the $300,000 salary is guaranteed. The remaining $700,000 depends on grant policy, board discretion, stock price performance, and company-specific metrics—all variables that would increasingly be influenced by shareholder activism. 

For senior leaders especially, this potential shift calls for a reassessment of how much annual spending is supported by equity vesting. If lifestyle inflation has tracked peak compensation years, it may be wise to recalibrate before grant sizes or performance payouts are cut back. 

This evolving attitude toward stock-based compensation will not only affect existing employees; it is likely to reshape how tech workers approach the job market altogether. If investors continue pressing companies to curb dilution and reduce reliance on share buybacks to support grant programs, future equity packages may look meaningfully smaller, changing the dynamic of future negotiations. 

A candidate considering a lateral move today may need to scrutinize both the headline value of the grant and the company’s broader capital allocation philosophy. Is stock-based compensation trending downward as a percentage of revenue? Has management publicly committed to reducing dilution? Are buybacks being scaled back to preserve cash or redirect investment toward AI infrastructure? 

None of this is to suggest that equity compensation is going away. It remains a powerful tool for aligning employee, employer, and shareholder interests. But tech workers receiving equity would be wise to stress test and model their financial plans under multiple scenarios. Similarly, if your long-term retirement projections assume continued equity upside, it may be time to revisit those assumptions since markets are forward-looking, and today’s valuations already reflect a more cautious view of software’s growth trajectory. 

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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.  

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Disclosures: 

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences. 

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