4 ms·

Why is stock such a big portion of compensation for the big tech companies?

thebean11 5y ago
My guess is that it lets companies pay higher salaries without affecting their cash flow (instead of paying cash, they dilute the stock).
bern4444 5y ago
I'm not from levels.fyi but I think some reasons are * Its cheaper for the company than cash (stock is the company's currency, they can issue more of it, decrease the supply, use it as collateral in financing etc) * It can be better for the employees (pay less in taxes, more opportunity for growth) * Incentives become aligned (I now care about the continued success of the company more so than I otherwise would)
- zuhayeer 5y ago
  Yup the higher you go in level, the larger your stock compensation is to tie you to company growth and align incentives. A company that's the exception to this is Netflix: https://www.levels.fyi/company/Netflix/salaries/Software-Engineer/Senior-Software-Engineer/ https://www.levels.fyi/company/Netflix/salaries/Software-Eng... They have one level and pay all cash with an option to convert some of it to equity.
  - bern4444 5y ago
    I thought Netflix let you pick the exact split between cash and equity no? For example, for a 500k salary you could say, I want 200k cash, and 300k in stock
    - pumaontheprowl 5y ago
      Something doesn't add up here. Levels is showing that the average senior engineer at Netflix is only getting $11k stock though. If employees were allowed to choose what percentage stock they wanted, I'd expect most employees to choose a larger percentage than that. Stock is likely to grow in value over the course of the year while cash is almost guaranteed to lose value due to inflation. You'd have to be pretty pessimistic about Netflix's future to choose the all-cash option. And even if you're only neutral about it, the stock is the better choice because it's inflation protected. If I were a Netflix employee, I'd probably choose $200k cash, $300k stock. The fact that levels is reporting such wildly different numbers tells me employees don't actually have that level of freedom to control their comp.
      - deleted 5y ago
        [deleted]
      - extesy 5y ago
        You can always buy NFLX with cash in your brokerage account. It's not like you are going to get any discounts if you choose to receive part of your salary in stock.
        bern4444 5y ago
        If you're granted stock on a vesting schedule (even if its 1 year), doesn't it qualify for long term cap gains if you don't sell? So you only pay potentially long term capital gains. versus If you get cash, pay income tax on it, and then invest it, and then pay cap gains, that's another round of taxes you pay no?
        LadyCailin 5y ago
        No, pretty sure not. First of all, the “buy” date is the date it vests, not the date it was initially granted. Secondly, you pay normal income tax on stock grants. So if $100 of stock vests today, you pay normal income tax on $100, and the cost basis and “buy” date are set to $100 and today. If you hang one to the stock for a year, then sure, you get long term gains, but then it’s the same boat as if you just got cash then bought it for $100. ESPP can be a bit different, because you get a discount on the stock, but that discount is also taxed at normal income rates, and anyways is capped at like 15% or something.
        bern4444 5y ago
        Okay, thanks for the walk through. Getting my first stock grant later this year and I was a bit confused by this
    - zuhayeer 5y ago
      It's ESPP up to a certain limit, so not as flexible of a choice
  - dilat 5y ago
    How does Netflix compete for post-senior talent with only one level? (i.e. “staff” and beyond)
    - zuhayeer 5y ago
      Their compensation philosophy is to pay at personal top of market for most roles. That said, compensation packages can differ significantly on a case by case basis depending on candidate experience. What they may not capture in title / level, they capture in variance of salary.
    - borroka 5y ago
      One level, but different compensation. For SWE IC, it can range between 300k and 700 (plus in some cases). The same for higher levels, there is a big variance in comp. You can use up to full salary to get options (not shares) at 40% (used to be, I don't know now).
      - dilat 5y ago
        Oh… so they basically have levels, just informally? Or are the expectations actually the same for two people making 300 and 700?
        borroka 5y ago
        They pay market value. Let's say that you come to Netflix with a Facebook offer (or current salary), Netflix wants you, they pay >= FB offer or current salary. If you don't have any offer, they have tech-wide salary surveys that give them a market range for you. Clearly, nothing is set in stone and a hiring manager can "bet" monetarily on some candidates (i.e., pay them more of what the data points would recommend). When I was there, I was making a (very generous) x and others in my position were making 1.8-2 x no doubt.
- cobookman 5y ago
  For employees you pay the same in taxes. RSUs are treated as income just in Stock based compensation vs USD. RSU vest is the same as taking a USD based salary and purchasing the shares. The Employees do get the benefit that between the grant date and vest date, the RSU value could increase. And the employee gets the benefit of capturing that growth. E.g. if 100k of RSUs granted, and 25% of it vested each year. Say in year 4 the value doubled. So they'd get 50k of RSUs and when it vests the employee is taxed as if it is income, and pays income tax on the 50k value.
  - 6gvONxR4sf7o 5y ago
    ISOs can sometimes be better for taxes (and sometimes worse).
b20000 5y ago
it looks better on the balance sheet / PNL statements
a1pulley 5y ago
This might be a cynical take, but in addition the things you typically hear, like improving cashflow and aligning incentives, I think it makes it easier to manage employees out. I.e., if you want to replace someone who it would otherwise be hard to fire, you could start refresher grants late or make them small enough that come year 5, it makes more financial sense for the employee to leave willingly. Some explanation, in case people aren't familiar with "big N" or FAANG comp schemes: when you get an offer, you're given a "base salary"—somewhere between 100 and 250k unless you're quite senior—a four year RSU (stock) grant with some vesting conditions, and info on typical year-end cash bonuses and RSU refreshers. The annualized four year grant is usually somewhere between 50% and 200% of your base salary, depending on seniority. See levels.fyi for details. A "refresher" is a four year grant given in each of years n, n + 1, n + 2, ..., where n is typically year 2. The refresher is usually a quarter of your initial grant, but companies often given themselves a lot of legroom to adjust this number depending on market conditions, employee performance, etc.
paxys 5y ago
If the company has a few good quarters of stock appreciation, your employees are now effectively tied in ("golden handcuffs") and will not be able to get matching offers elsewhere.
- 6gvONxR4sf7o 5y ago
  Which ends up being great for the labor market, as starting offers have to rise to lure those stock-inflated candidates away.

My guess is that it lets companies pay higher salaries without affecting their cash flow (instead of paying cash, they dilute the stock).

bern4444 5y ago

I'm not from levels.fyi but I think some reasons are * Its cheaper for the company than cash (stock is the company's currency, they can issue more of it, decrease the supply, use it as collateral in financing etc) * It can be better for the employees (pay less in taxes, more opportunity for growth) * Incentives become aligned (I now care about the continued success of the company more so than I otherwise would)

zuhayeer 5y ago
Yup the higher you go in level, the larger your stock compensation is to tie you to company growth and align incentives. A company that's the exception to this is Netflix: https://www.levels.fyi/company/Netflix/salaries/Software-Engineer/Senior-Software-Engineer/ https://www.levels.fyi/company/Netflix/salaries/Software-Eng... They have one level and pay all cash with an option to convert some of it to equity.
- bern4444 5y ago
  I thought Netflix let you pick the exact split between cash and equity no? For example, for a 500k salary you could say, I want 200k cash, and 300k in stock
  - pumaontheprowl 5y ago
    Something doesn't add up here. Levels is showing that the average senior engineer at Netflix is only getting $11k stock though. If employees were allowed to choose what percentage stock they wanted, I'd expect most employees to choose a larger percentage than that. Stock is likely to grow in value over the course of the year while cash is almost guaranteed to lose value due to inflation. You'd have to be pretty pessimistic about Netflix's future to choose the all-cash option. And even if you're only neutral about it, the stock is the better choice because it's inflation protected. If I were a Netflix employee, I'd probably choose $200k cash, $300k stock. The fact that levels is reporting such wildly different numbers tells me employees don't actually have that level of freedom to control their comp.
    - deleted 5y ago
      [deleted]
    - extesy 5y ago
      You can always buy NFLX with cash in your brokerage account. It's not like you are going to get any discounts if you choose to receive part of your salary in stock.
      - bern4444 5y ago
        If you're granted stock on a vesting schedule (even if its 1 year), doesn't it qualify for long term cap gains if you don't sell? So you only pay potentially long term capital gains. versus If you get cash, pay income tax on it, and then invest it, and then pay cap gains, that's another round of taxes you pay no?
        LadyCailin 5y ago
        No, pretty sure not. First of all, the “buy” date is the date it vests, not the date it was initially granted. Secondly, you pay normal income tax on stock grants. So if $100 of stock vests today, you pay normal income tax on $100, and the cost basis and “buy” date are set to $100 and today. If you hang one to the stock for a year, then sure, you get long term gains, but then it’s the same boat as if you just got cash then bought it for $100. ESPP can be a bit different, because you get a discount on the stock, but that discount is also taxed at normal income rates, and anyways is capped at like 15% or something.
        bern4444 5y ago
        Okay, thanks for the walk through. Getting my first stock grant later this year and I was a bit confused by this
  - zuhayeer 5y ago
    It's ESPP up to a certain limit, so not as flexible of a choice
- dilat 5y ago
  How does Netflix compete for post-senior talent with only one level? (i.e. “staff” and beyond)
  - zuhayeer 5y ago
    Their compensation philosophy is to pay at personal top of market for most roles. That said, compensation packages can differ significantly on a case by case basis depending on candidate experience. What they may not capture in title / level, they capture in variance of salary.
  - borroka 5y ago
    One level, but different compensation. For SWE IC, it can range between 300k and 700 (plus in some cases). The same for higher levels, there is a big variance in comp. You can use up to full salary to get options (not shares) at 40% (used to be, I don't know now).
    - dilat 5y ago
      Oh… so they basically have levels, just informally? Or are the expectations actually the same for two people making 300 and 700?
      - borroka 5y ago
        They pay market value. Let's say that you come to Netflix with a Facebook offer (or current salary), Netflix wants you, they pay >= FB offer or current salary. If you don't have any offer, they have tech-wide salary surveys that give them a market range for you. Clearly, nothing is set in stone and a hiring manager can "bet" monetarily on some candidates (i.e., pay them more of what the data points would recommend). When I was there, I was making a (very generous) x and others in my position were making 1.8-2 x no doubt.
cobookman 5y ago
For employees you pay the same in taxes. RSUs are treated as income just in Stock based compensation vs USD. RSU vest is the same as taking a USD based salary and purchasing the shares. The Employees do get the benefit that between the grant date and vest date, the RSU value could increase. And the employee gets the benefit of capturing that growth. E.g. if 100k of RSUs granted, and 25% of it vested each year. Say in year 4 the value doubled. So they'd get 50k of RSUs and when it vests the employee is taxed as if it is income, and pays income tax on the 50k value.
- 6gvONxR4sf7o 5y ago
  ISOs can sometimes be better for taxes (and sometimes worse).

b20000 5y ago

it looks better on the balance sheet / PNL statements

a1pulley 5y ago

This might be a cynical take, but in addition the things you typically hear, like improving cashflow and aligning incentives, I think it makes it easier to manage employees out. I.e., if you want to replace someone who it would otherwise be hard to fire, you could start refresher grants late or make them small enough that come year 5, it makes more financial sense for the employee to leave willingly. Some explanation, in case people aren't familiar with "big N" or FAANG comp schemes: when you get an offer, you're given a "base salary"—somewhere between 100 and 250k unless you're quite senior—a four year RSU (stock) grant with some vesting conditions, and info on typical year-end cash bonuses and RSU refreshers. The annualized four year grant is usually somewhere between 50% and 200% of your base salary, depending on seniority. See levels.fyi for details. A "refresher" is a four year grant given in each of years n, n + 1, n + 2, ..., where n is typically year 2. The refresher is usually a quarter of your initial grant, but companies often given themselves a lot of legroom to adjust this number depending on market conditions, employee performance, etc.

paxys 5y ago

If the company has a few good quarters of stock appreciation, your employees are now effectively tied in ("golden handcuffs") and will not be able to get matching offers elsewhere.

6gvONxR4sf7o 5y ago
Which ends up being great for the labor market, as starting offers have to rise to lure those stock-inflated candidates away.