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Risk premium: you could have your money in government bonds, so to entice you to put them in something riskier, you have to offer a better return. The riskier,

Risk premium: you could have your money in government bonds, so to entice you to put them in something riskier, you have to offer a better return. The riskier, the more people have to think it can outperform. That's not to say that this is what ends up being realised, otherwise it wouldn't be risk. Not clear how this connects with this idea about tech salaries. Where's the uncertain outcome? Person potentially jumps to FAANG? What's the certain outcome in the analogy?

francisofascii 7y ago
If I am reading this correctly, the certain outcome is when the smaller company pays a salary equal to FAANG. The person has no incentive to jump. The uncertainly is when the company pays less than a FAANG salary, pocketing the extra salary not being paid, and taking the risk the person does not jump. The lower the salary, the more risk the person jumps, but the more money the company saves.
bhl 7y ago
The analogy of tech salaries to returns on bonds only works, as other commentators have pointed out, when talking about programmers who have experience at a Big N company and are being recruited into well funded startups. In this case, it works because startups (corporate bonds) have to offer a higher compensation (interest rate), often times made up of equity, to offset the risk of joining a startup compared to Big N (government bonds). The uncertain outcome is the startup failing (company not meeting their expectations). The reason why it doesn’t generalize to the entire tech industry is because not everybody has Big N experience while anyone can buy a government bond.
lifeisstillgood 7y ago
I think you are right - if my sleep addled brain gets it, I think that the hiring of a developer implies a programme of tech led change to be applied to the company. so the steady state (the Treasury Bond Risk Free Return) is not changing the company to have web-enabled doodads but just collecting the cash from your customers for the next five years. (I suspect there are plenty of businesses where this might apply - run it to the ground with minimal investment.) So the risk premium is the cost of the programme to build doodads (the extra ROI is what you will make as a shareholder if you hire a developer to make your doodads.) This then gives me two risks - the risk that doing nothing tanks the business away faster than predicted, and the risk that the programme fails. So developer salaries are paid as a risk premium against tech driven change in your industry, and the risk of buy vs build. So developer salaries might be better compared not against AmaGooFace stopping hiring, but against the spread of SaaS based services that can reduce the risk of a failed build. Perhaps we should all go out, Luddite fashion, and smash the Looms of our SaaS startups?

francisofascii 7y ago

If I am reading this correctly, the certain outcome is when the smaller company pays a salary equal to FAANG. The person has no incentive to jump. The uncertainly is when the company pays less than a FAANG salary, pocketing the extra salary not being paid, and taking the risk the person does not jump. The lower the salary, the more risk the person jumps, but the more money the company saves.

bhl 7y ago

The analogy of tech salaries to returns on bonds only works, as other commentators have pointed out, when talking about programmers who have experience at a Big N company and are being recruited into well funded startups. In this case, it works because startups (corporate bonds) have to offer a higher compensation (interest rate), often times made up of equity, to offset the risk of joining a startup compared to Big N (government bonds). The uncertain outcome is the startup failing (company not meeting their expectations). The reason why it doesn’t generalize to the entire tech industry is because not everybody has Big N experience while anyone can buy a government bond.

lifeisstillgood 7y ago

I think you are right - if my sleep addled brain gets it, I think that the hiring of a developer implies a programme of tech led change to be applied to the company. so the steady state (the Treasury Bond Risk Free Return) is not changing the company to have web-enabled doodads but just collecting the cash from your customers for the next five years. (I suspect there are plenty of businesses where this might apply - run it to the ground with minimal investment.) So the risk premium is the cost of the programme to build doodads (the extra ROI is what you will make as a shareholder if you hire a developer to make your doodads.) This then gives me two risks - the risk that doing nothing tanks the business away faster than predicted, and the risk that the programme fails. So developer salaries are paid as a risk premium against tech driven change in your industry, and the risk of buy vs build. So developer salaries might be better compared not against AmaGooFace stopping hiring, but against the spread of SaaS based services that can reduce the risk of a failed build. Perhaps we should all go out, Luddite fashion, and smash the Looms of our SaaS startups?