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.
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 at 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 in 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 which truly does 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 $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 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 consistently 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 won't even unlock their 15% for year 2.
So, when hiring, Amazon can 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 which 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 tripled 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 sorts of vesting shenanigans have always been common throughout tech but recently, we saw Google stoop to this tier as well with their own trick.
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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 upfront but don’t be fooled, that’s by design.
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 its 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 become 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 article 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 the 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 got 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, but the operating profit per employee at these companies will likely go up substantially.
This will be in line with these companies honing in on their final push for monetization as well, so the 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.
