Care about Total Compensation

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Different companies use different compensation models. To compare models use total compensation, not salary. The compensation models are arbitrary and complicated. For example, Amazon clips salary at 160K$/yr, and doesn’t have bonuses. Google vests stocks Monthly. Facebook bonuses have a company performance multiplier. At some companies signing bonuses can be over 100% of salary!

Total Compensation - It gets complicated

Understand your total compensation which is a combination of salary, cash bonus, and equity. For example, imagine making a steady state total compensation of 200$/ year(see assumptions below). For this example, imagine this breakdown (each company has a different model):

  • Base salary: 150$/year, paid out bi-weekly.
  • Cash Bonus: 25$/year, paid out annually.
  • Equity Grant: 25$/year, paid out annually vesting over 5 years.
  • Equity at 5th year: 25$ paid out annually.
  • Equity at 1st year: 5$ paid out first year.

Imagine you switch companies right after the cash and equity has been rewarded, and negotiate a total compensation of 200$/year, with the same salary/cash/stock ratio.

The first year your comp will only be your salary - 150$. This means you’re losing 50$ on the first year. The second year, you’ll get salary, cash bonus, and some equity, BUT your equity hasn’t fully vested, so you’ll only make salary and bonus of 180, meaning you still lose 20$ in the second year. In table form:

Year Base Bonus Stock Total Lost
0 150 0 0 150 50
1 150 25 5 (yr 0) 180 20
2 150 25 10 (yr 0,1) 185 15
3 150 25 15 (yr 0,1,2) 190 10
4 150 25 20 (yr 0,1,2,3) 195 5
5 150 25 25 (yr 0,1,2,3,4) 200 0
6 150 25 25 (yr 1,2,3,4,5) 200 0

Continuing the math, you’ll actually need a signing bonus of 100$ to just cover your lost income from the previous years. Suddenly your 100% of salary signing bonus of 100$ doesn’t seem nearly as awesome.

Initial Grant Models - By Company

Each company does a different comp model. I’ll list the ones I’ve been told. This data is likely stale.

Company Salary Cash Bonus Stock Model
Amazon Yes Maximum 160K Only in first 2 years 4 year grant. Per year 5%,15%, 40%, 40%
Google Yes Yes 4 year grant vest monthly
Facebook Yes Yes 4 year grant vest quarterly
Indeed Yes Yes It’s a private company and using something like stocks called LTIPs very complex
Microsoft Yes Yes Unknown

Steady State Comp Approaches - Independent vs Total Comp

The details get complex, so these are simplified models to build a mental model, not accurate models to compute compensation.

For example, imagine you have a base salary of 50$ and because of your performance you should be paid 100$. To simplify we’ll say the compensation is paid in cash (but in reality it’s probably stock with a vesting schedule).

Independent Comp This is the Microsoft model, it’s very simple. You should be paid a 100$, you currently get a salary of 50$, therefore you’ll get an extra 50$. This is completely independent of previous years.

Total Comp At Amazon, they do payout based on expected total comp. This means to compute this years bonus, you need to know how much you’re making as a result of previous years stock (often un vested). In the simple case, imagine you have no compensation from previous years stock contribution (doesn’t happen in practice). In that case, Amazon will be identical to Microsoft and pay you 50$.

However, imagine due to stock appreciation, you’re already making 150$ this year in total comp. Amazon will give you zero extra dollars for this year as you’re already paid beyond the current compensation. They will pay into future years (I know it’s complicated).

A question that comes up in a total comp model, is will Amazon make you whole. E.g. if due to stock depreciation you’ve lost 30$, so you current compensation is 20$, will amazon give you 50$ or 80$? I don’t know. Luckily for Amazon this has never happened.

Assumptions

Bonus and equity often vary based on performance. This article assumes you always perform to the same target performance.

Equity based compensation is a function of stock price, and this article assumes a stable stock market price. This can be a bad assumption, for example, Amazon increased 375% and Microsoft increased 200% over the 4 years from June 2014 to June 2018.

FAQ

Why do I feel so bad?

I compared salaries and now I feel awful

There’s an old joke - when 2 people compare salaries, one of them is going to walk away feeling ecstatic, and the other miserable. Be cautious when comparing salaries, as your pride can start fucking with you.

Wow, I had no idea, how do I get a new high paying job?

Job hunts are really stressful. If you decide to change jobs, check out reducing job hunt stress.

Should you include stock appreciation in total compensation?

NO! If you are doing this, you’re assuming you can “predict the market”.

If you have that skill, that’s the optimum way to make money. Skip your job hunt, and buy stocks today!

How do I translate job levels between companies?

Compensation is often a function of “job level” which varies by company. This site translates ladder levels between the big tech companies nicely (but not the compensation levels).

I read on the internet company Foo pays Bar. Is that true?

Maybe, but I doubt it. Don’t forget the old joke when 2 people compare salaries, one of them is going to walk away feeling ecstatic, and the other miserable. Be cautious when comparing salaries, as your pride can start fucking with you.

Is it fair that promotions pay at the bottom of the pay scale, and new hires tend to be at the top?

First how do companies determine pay? Usually companies seek to be fair, which they do by establishing a pay range for a level, and then pegging that range to a percentile of the industry. A fictitious example, industry pay range for a Senior is 100$ to 200$, 75th percentile at 175$. A company wants to set their comp at p75 of industry so they set their senior pay band from 170$ to 180$.

Now people want to get raises every year, so companies would give someone promoted into senior 170$, and as years go by they get raises till they rise to 180$.

For new hires, offers tend to be at the top of (if not over) the pay range but fairness continues to be the doctrine.

The industry range for offers is higher because 1) you don’t want to lose a good candidate due to a higher competing offer 2) you tend to hire people who are already well experienced in the band. 3) As a result of the high level of experience, you can be optimistic that person will be promoted shortly, and if they don’t the extra compensation will be corrected by the 4 year cliff.

You hire people who tend to be high in the band because it ensures they’ll be successful. Changing companies has significant head winds (new culture, new tech, new process, no network). If someone is at the bottom of the band when they interview, they tend to be downlevelled to avoid them failing at the higher level.

What is the four year cliff?

Often, if you don’t get a promotion in the 4 years after you’ve been hired, your pay will drop. This is because many tech companies give an initial stock grant over four years. This grant is often really good at the 4 year mark because 1) the job market was competitive and you were at your best when you were hired, so you got a great offer 2) your stock has had 4 years to appreciate!

Should I negotiate?

As of 2019, I’ve never seen an offer redacted due to negotiation (OK, with one very unlikely exception which has happened to me). This is true at the big tech companies, and the middle sized tech companies, not sure about small tech companies. The best way to negotiate is to have competing offers.