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.