BIG TECH SALARIES:
Over the past decade, tech salaries have gone to the moon. Thanks
to high profit margins, ubiquitous scale and seemingly infinite growth potential, there was
basically no limit when it came to compensation. It was almost like NFL recruiting or something.
Engineers would get offers from multiple top tier companies and have them enter a bidding war
against each other. And over time, this has resulted in entry level engineers earning nearly
$200,000, senior managers crossing $400,000, and directors earning more than a million dollars
per year. And given that these compensation packages often came with a bunch of stock that
was growing 5-10x if not more, we saw the rise of a whole new demographic of multi millionaires
and deca millionaires. All of this peaked in 2021 when demand for top tier engineers went through
the roof thanks to the pandemic. Tech compensation was growing faster than real estate prices,
and one point, Zuckerberg was even throwing a tantrum about how only half of his top tier
job offers were being accepted. But a lot has changed since then and it seems that this decade
of seemingly infinite compensation growth is finally coming to an end. With high interest rates
and stagnating revenue growth, tech companies are finally having to shift their focus to maximizing
profits. This included new monetization efforts, layoffs, eliminating unprofitable programs,
and of course cutting salaries. But this wasn’t as straightforward as you might think. It’s not
like Google is suddenly handing out compensation packages that are a good amount lower than usual.
This would not only make it hard to recruit new engineers but it would also earn them a bunch
of bad press in the one area that they’re still highly respected: strong compensation and great
corporate culture. As such, these companies have decided to go about salary cuts in a much more
nefarious manner, hiding them in fine print and seemingly pro employee policies. So, here’s
the overdue collapse of big tech salaries. PREDATORY VESTING:
To really understand how exactly these companies are cutting compensation, we have to
first understand how big tech compensation works. For example, if you’re a director at Facebook,
it’s not like you’re earning $1.3 million per year cash. Rather, only about $320,000 is paid out
in the form of base salary. The vast majority or nearly $900,000 is paid out in the form of stock
compensation. There are some exceptions to this rule like Netflix who truly do pay out million
dollar cash salaries. But for the most part, a more modest cash salary plus an insane stock
package is how big tech compensation breaks down. And the recent pay cuts primarily have to do with
the stock portion of the compensation. You see, the stock portion isn’t exactly what it seems
either. It’s not like you’re consistently paid the stock grant every month just like a cash salary.
Rather, the stock grant usually comes in blocks of 4 years and unlocks in regular intervals
throughout that time period. For example, if an engineer was earning an average of a $100,000
per year in stock, then their actual compensation package was probably $400,000 worth of stock
over 4 years. And after the 4 years is up, they might get refreshers or they might need
to get promoted in order to get another 4 year grant. Now, all of that might seem like too many
details but it’s important because like I said, the catch is in the fine print. The industry
standard is for stock grants to unlock in a consistent manner throughout the vesting period
at 25% per year. Anything else is sus and there’s usually more going on than what meets the eye.
Amazon for example is notorious for sporting an extremely skewed vesting schedule. In year 1,
only 5% of the stock grant unlocks and in year 2 only 15% unlocks. It’s not till year 3 and 4
that you receive 80% of your stock grant. Why do they do this you ask? Well, Amazon knows
that the average employee doesn’t even last 2 years meaning that they likely wont even
unlock their 15% for year 2. So, when hiring, Amazon is able to pitch a $400,000 stock grant as
an average of $100,000 per year in compensation, but the average employee only ends up unlocking 5%
of this or $20,000, saving Amazon a bunch of money in terms of stock comp. Coming from Amazon,
that’s probably not all that surprising but backloaded stock vesting is just one trick in the
book. Another trick that companies use is annual vesting like is the case with Stripe. Instead of
receiving a 4 year grant that unlocks over time, Stripe likes to hand out a new 1 year grant every
year which makes it much harder for employee stock comp to compound with the company. For example,
if you were earning $100,000 per year in stock and your company triples over the next 4 years,
then you’d be earning $300,000 in the 4th year. At Stripe, however, you’d still be earning
$100,000 despite potentially playing a crucial role in helping the company triple. These sort
of vesting shenanigans have always been common throughout tech but recently, we saw Google
stoop to this tier as well with their own trick. FRONT LOADED VESTING:
In 2021, Google adopted a new front loaded vesting schedule which consisted of 33% in the
first 2 years, 22% in the 3rd year, and 12% in the 4th. At first glance, it seems like this vesting
schedule is actually more generous. They’re giving employees more of the stock grant up front but
don’t be fooled, that’s by design. You see, if the overall stock grant stayed consistent, this would
indeed be a superior vesting plan. But that’s not quite what Google is doing. Rather, they’re using
front loaded vesting to inflate their 1st year compensation numbers. For example, if you were
a potential L6 hire at Google, they might tell you this. We’ll pay you industry standard 1st year
comp of $250 cash, $250 stock, and $50 bonus. That sounds about right but the catch is in the stock.
Before, the $250 stock that you would earn in your first year was only a quarter of the total stock
you would receive. Aka, you would earn a total of a million dollars in stock over the next 4 years.
But now, the $250 stock that you earn in the first year is a third of your total stock comp. Aka, you
now only earn $750 in stock over the next 4 years and Google saves a full quarter million. And,
that was just with their original front loaded vesting plan. Since then, Google has become even
more aggressive with their front loaded vesting. Their current main vesting plan is 38% in the 1st
year, 32% in the 2nd year, 20% in the 3rd year, and 10% in the 4th year. Again, if you were an
L6 engineer, this means that instead of earning $1 million over 4 years, you would now “only”
earn $657,000. And it doesn’t stop right there either. Google has an even more aggressive front
loaded plan as well. In this vesting schedule, you get 50% in the 1st year, 28% in the 2nd year,
12% in the 3rd year, and 10% in the 4th year. Aka, instead of earning a million in stock,
you’re now down to half a million, and Google has effectively saved on nearly a full
year of compensation that they would’ve previously paid out. Obviously quite a bit of savings but
all of that only tells half the story. One of the main benefits of stock compensation is that it
can enjoy outsized returns as the company grows. But as big tech approaches maturity, the expected
returns on stock comp also becomes a lot lower due to diminishing returns. For obvious reasons,
it’s much easier to go from being a $250 billion company to a $1 trillion company than it is to go
from $1 trillion to $4 trillion, and this plays a huge role in total comp. If you joined Google
in 2017 for example, you saw Google stock over triple. This meant that the $1 million stock grant
that you got when you joined was actually worth $3 million by the time it fully unlocked. If you
joined Google in 2021, however, you were actually down as much as 45% on your stock. But let’s even
assume that Google ends up fully recovering and growing by 50% over the next 2 years. This would
be phenomenal for a mature company like Google but the same cannot be said about comp. You’re now
half as large stock grant of $500,000 will “only” end up being $750 at the end of 4 years. In other
words, it’s now 3-4 times less lucrative to join Google today than it was just a couple of years
ago. And all of that is assuming that you’re able to get the same 1st year comp. It turns out that
that itself would probably be quite challenging. A SALARY COLLAPSE:
Everything that we’ve talked about so far are shadow cuts: things that aren’t really apparent
unless you look at the fine print. But, the truth is that big tech has had upfront salary cuts as
well. Thanks to remote work, big tech has not only had an opportunity to pay less for office space
but pay employees less as well. In fact, Google directly cut salaries of remote workers by as
much as 25%. Now, this isn’t as bad as it sounds because these cuts were in line with employees
moving to lower cost of living cities. But, this is nonetheless massive salary savings for
Google. Big tech has in general started focusing their hiring efforts on lower cost of living
areas within the US and offshoring many jobs and sectors. Google has also cut a bunch of employee
benefits and even gone as far as tracking employee badges to maximize productivity. I’ve been picking
on Google for most of this video but that’s just because they’re the most notable example. These
same practices have been commonplace across all of the tech. And if you were to confront these
companies about any of this, they’d probably have a couple of key counterpoints. They might say
that the overall stock grant doesn’t decrease by as much as the vesting schedule might suggest.
For example, 50% vesting in year 1 would suggest a stock comp cut of as much as 50% but the real
number might actually only be 20 or 30%. They would probably also bring up a point about how
they hand out stock refreshers in year 3 and 4 that could help make up for any decreases in total
comp. But regardless of how exactly they justify it, it doesn’t really change that fact that
working in big tech isn’t nearly as lucrative as it once used to be. Back then, your total
stock comp wouldn’t have been 20 to 30% less, you would’ve still gotten the same refreshers in
year 3 and 4, you wouldn’t be facing salary cuts due to remote work, and the stock would’ve had
substantially more upside potential. And when you put all these factors together, you’ll
see that joining FAANG today could easily be 50 to 70% less lucrative than it was in the
2010s. With that being said, it’s not like tech workers are doing bad by any means. Instead of a
staff engineer earning $4 million over 4 years, now they’re $1.5 to 2 million which is indeed
substantially less but also still an insane amount of compensation that’s a lot higher than you could
earn anywhere else. So, I’m not exactly suggesting that you feel bad for FAANG engineers but it
does bring up the question of: where exactly does this leave big tech? Well, all of these cost
saving measures are only now going into place, so expect it to take 4-5 years for all of the
results to come it, but it’s likely that the operating profit per employee at these companies
will go up substantially. This will be inline with these companies honing in on their final push for
monetization as well, so bottom lines should go up quite nicely across the board. But that should
pretty much be it as that would result in these companies fully maturing. They’ve spent the last
20 years on pure growth which is now very much starting to slow down. So, the logical move is
to focus on maximum profitability and reach their final form and become the next Cisco or IBM. In
the meantime, we’ll likely see the best employees at all of these companies leave in droves not
even because of the lower comp but because of the work itself. Moving forward, their jobs will
be more about increasing efficiencies and reducing overhead as opposed to building the next big
thing. So, it’s only natural that the aspirational types move onto smaller companies where they
can not only earn a lot more but do a lot more. And that is the state of big tech compensation
today. All of this is rather new for FAANG but it’s already been playing out in Europe for quite
some time. Check out this video to learn more.
