Despite the war, tech salaries rose 8% between June 2023 and 2024, above the average salary rise of 5.1% in the entire economy. The average monthly tech salary in Israel is now a gross NIS 32,215.
But tech companies are being much less generous when it comes to handing out share options to employees - a very popular remuneration mechanism at startups and growth companies, which can become major amounts if a company is sold or holds an IPO. Moreover, share options are only taxable at a rate of 25%, significantly low compared with income tax on monthly salaries.
Research by IBI Capital Group, which currently manages more than half of the options market for Israeli tech companies, indicates that the number of options given to employees in the industry declined during the first half of 2024 by 12.6% compared with the corresponding period of 2023. The sample included 500 private Israeli privately held tech companies that granted options both in the first half of this year and in the first half of 2023, which makes it possible to compare them. The research was carried out by the S Cube valuation company founded by Gidi Shalom-Bendor and sold to IBI Capital.
Growth plans have been reduced
Shalom-Bendor tells "Globes," "Israeli tech companies have reduced their growth plans, partly due to the consequences of the war and frequent and prolonged reserve duty for employees. Some have even frozen hiring and accordingly the tech labor market is undergoing changes. Employees are aware of the situation and tend to change jobs less, and as a result companies, are protecting their budgets and need to invest less in retaining employees and, accordingly, grant fewer options than in the past."
Shalom-Bendor points out that the decrease in the number of financing rounds for startups also contributes to the fall in the number of options granted employees. "Each financing round means a dilution for existing shareholders, and since there are fewer financing rounds there is less need to compensate existing shareholders who were diluted by granting more options."
The downward trend in the first half of 2024 continues a similar trend in 2023. According to S Cube, there was a 12.2% fall in the amount of options granted to employees in relation to 2022. This figure was found in a study of a larger sample of 1,040 private companies. The decline in medium and large companies was smaller. According to the study, at companies with more than 50 employees who were offered options, there was a decrease of 11.52% in 2023, while at companies where the number of employees was up to 50, a fall of 13.5% was seen in the same period.
An option is an incentive because it is guaranteed to the employee at a relatively low price based on the assumption that the value of the share will only increase - so the employee will pay a discounted price for each share.
However, due to the crisis in the tech industry that began in May 2022 and the flight of many investors from investing in the field, the share prices of private companies fell below the exercise price of their options, in what was called in the industry as "going out of the money." Because of this, many companies adjusted option prices at their own expense in order not to cause unrest among employees, but Shalom-Bendor reveals that most companies abandoned these plans at the outset.
He says, "Many companies considered repricing the options, so that the exercise price dropped, for example, from $3 to $1. The interest in such a move was huge in the last two years, but in practice the number of companies that took the move was in the single digits, and that's because it requires a lot of work and effort, mobilizing legal and financial teams and also fear of loss of reputation. Repricing sends a bad message to the market that the value is falling, and what's more, this comes at the expense of investors and other shareholders."
Published by Globes, Israel business news - en.globes.co.il - on September 30, 2024.
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