6 ms·

The reason why business types see engineers as cost centers is because engineers have positioned themselves that way. Engineers pushed for higher salary in lie

by veyron 15y ago

The reason why business types see engineers as cost centers is because engineers have positioned themselves that way. Engineers pushed for higher salary in lieu of the variable upside. What engineers really need to do is to put more skin in the game. Push for more equity, even if it means accepting a smaller salary. All too often I see programmers who just want a 9-5 that pays 6 figures even if the company is seeing hard times, but that won't improve the situation. Most of those business types you mention see engineers in the same way that engineers see themselves: wanting a large, stable paycheck. The business types shoot for the large end of year bonuses, which in general only get paid if the company does well (ignore the TBTF banks for a moment) As an example of what I mean, most celebrity endorsements are lump sum payments plus a very small variable upside. William Shatner, taking a longer view, pushed Priceline to compensate him (for his celebrity appearance) in the form of equity, and now he's laughing his way to the bank. In this case, he was willing to take the risk.

Woost 15y ago
This isn't as simple as "push for equity". There are plenty of companies where equity makes no sense (say, a private consulting company, or a company with no plans to sell a la 37signals) What other options are there? Guaranteed end of year bonuses? Commissions in the form of profit sharing?
- mvc 15y ago
  Presumably, equity in these companies would be like being a "partner" in a law/accountancy firm.
  - tomkarlo 15y ago
    I hope not. If you talk to folks in law, in particular, the partnership system is broken. It basically results in a situation where it's in the interest of the existing "partners" to have as many "non-partner" employees as possible, dangle the carrot of partnership in front of them so they work really hard, but in reality only promote 1% or so to partner. That maximizes the return to existing equity holders but it means life sucks for everyone junior.
    - rayiner 15y ago
      Yet the partner/director carrot in law/banking/consulting convinces tons of Harvard, Yale, etc, grads each year to work 80 hour weeks for their 20s for a shot at equity (which realistically is more like 5-10% at big NYC type places and upwards of 30% in secondary markets).
      - tomkarlo 15y ago
        This is really mostly a law thing - banks and consulting firms, by and large, aren't partnership models any more and haven't been in a long time. Any large bank or consultancy is public now, which means they give equity to employees out of a huge pool and it has relatively little effect on the comp of their managers. That's different from a law firm, where even in fairly large ones the addition of new equity partners can have a material impact on the existing partners' comp. As for making partner in a BigLaw firm, folks I've talked to describe it as "a longshot" to "nearly impossible." A firm like Skadden will hire 500+ new associates a year (worldwide) and name maybe 4-6 partners, not all of whom started as associates. Unlikely the chance of going from associate to partner breaks 1%. (Updated #s after asking someone who worked for Skadden.)
        rayiner 15y ago
        McKinsey and Bain are incorporated partnerships, and BCG is still an actual partnership. Goldman Sachs, JPM, etc, are public companies, but their investment banking and trading divisions operate very differently from a typical public company. GS, for example, pays out 50% of revenues as compensation, with MDs and PMDs (partner managing director) sharing from a huge profit pool. Internally they function very much like partnerships. As for the chances of making partner, it depends heavily on the firm and the year. Skadden is something of an outlier[1]. The other big NYC firms bring aboard about ~100-120 associates per year, and promote between 5-15 depending on the economy. The last few years it's been around 5 and during the boom it was around 15. At medium-sized firms outside NYC, the %-age is more like 20-35%, though profits-per-partner at those firms are more like $300-500k/year, versus $2m+ at Skadden. [1] Though your numbers seem grossly exaggerated. Worldwide Skadden brought aboard ~200 this year, which was a big crop. The two years before that were ~100 put together. And over the last few years, the partners promoted counts have been: 2007 (29), 2008 (25), 2009 (8), 2010 (6), 2011 (8).
- veyron 15y ago
  For private companies with no plans to sell, ideally it would be an arrangement where the engineer receives shares (in a C corp) or is written into the operating agreement as a partner (in an LLC or LP) but a profit sharing agreement would have the same effect. In major law firms, the associates aspire to become partners in the firm, which is analogous to my interpretation when saying "equity".
  - wanorris 15y ago
    Actually, setting up software firms where the best developers can "make partner" would be quite an interesting approach. I'm not sure it would work, but if it did, it could be a perfect solution for keeping a great team together for the long haul.
    - hammerdr 15y ago
      See: Accenture. It's a consulting company not a product company; it may be significantly different when "making partner" at a product company. However, from what I've heard, each partner at Accenture essentially runs his or her own business within the larger scale of the organization. Success is directly tied to the success of the internal mini-businesses. It is, however, an example of a company where IT professionals can become equity stakeholders in a private firm. I imagine a product company would need to make the partners in charge of one product each (or maybe a couple of partners on one product) in order to avoid the "Too many cooks in the kitchen" problem.
      - mathattack 15y ago
        Though your premise is correct, Accenture is public, not private. They (like many others) wanted to expand beyond pure consulting, and the partners wanted to cash out. Accounting and law firms may be a better example, though even they aren't as entrepreneurial as you think. They have their own regulations and internal politics.
    - wallflower 15y ago
      Most traditional firms, to make partner, you have to be personally responsible for a large amount of business. At Andersen, at one point, I heard the number was $10M/yr of revenue. It would be harder to figure out how much revenue is generated by an individual contributor (even if they are a superb coder). Also, partnership usually involves leadership decisions
- tptacek 15y ago
  Private consulting companies have all sorts of var comp plans; the most common is profit sharing.
- nikcub 15y ago
  It is funny that options are now so associated with a company exiting that we totally forget that their original purpose was as an efficient mechanism for profit sharing
  - tptacek 15y ago
    I was thinking exactly the same thing, about the parallels between speculative bets on appreciation and dividends.
- dmoney 15y ago
  I read in an interview that at the end of the year, 37signals takes most of its profits, and pays them as a dividend to its shareholders. I don't know if lay employees get a chance to own stock, but if they did it could be a great incentive.
SonicSoul 15y ago
structuring compensation as base / bonus could also alleviate this. at least that's the carrot finance industry is using to get most performance out of developers even though the bonus is usually exactly what promised/paid last year + n%. but it seems to work (especially around 3rd/4th quarter). but the higher you go, the higher % of your pay is bonus and supposedly tied to co performance. though this is not as good as equity as there is still no real ownership incentive.
- veyron 15y ago
  "structuring compensation as base / bonus could also alleviate this" <-- I am not convinced. If you knew that your bonus was a percentage of your salary, the only way that it would motivate you is if your salary was low (or if your bonus was extremely large). And for developers, the bonus is generally in the 10-30% of base salary range. There really has to be a variable component depending on the firm profits that isn't capped at a percentage of salary. "though this is not as good as equity as there is still no real ownership incentive." <-- this was the largest complaint to the investment banks transforming from partnerships to corporations (in the former case, the partners were personally liable for losses)
yuhong 15y ago
In fact, I think this problem is even worse in the CEO world due to the legacy MBA culture of greed.
georgemcbay 15y ago
"What engineers really need to do is to put more skin in the game. Push for more equity, even if it means accepting a smaller salary. All too often I see programmers who just want a 9-5 that pays 6 figures" A lot of engineers I know are like this because they were badly burned earlier on in their careers with promises of equity (while working below-market paying job for that equity) that turned into dust (due to massive dilution and other factors) even when the company had a very successful exit. One could argue there they only have themselves to blame for not being sure of the actual value of their position in all possible exit situations, but now you're arguing they shouldn't just be engineers but also financial/contract law experts, which is especially unrealistic when they are just getting out of school.
deleted 15y ago
[deleted]
lsc 15y ago
>What engineers really need to do is to put more skin in the game. Push for more equity, even if it means accepting a smaller salary. I disagree strongly. With that plan, (assuming you corrected the problem that most options at pre-public companies are basically revocable at any time.) you'd end up with a bunch of guys like me; Sellswords who are halfway to becoming a business people. And you know? even if you do keep us for a while, it's not going to be for long; my personal policy, when working for other people, is to always be looking, and jump if someone offers me 20% more. Loyalty? you are paying me 20% below market, how about you show me some loyalty. People like me? we're probably better off running our own companies. Really, if you want the skills people like me have? you are probably best off contracting with our company for the work. The sort of person who likes to be an employee is, well, rather different. They are usually quite risk-averse compared to someone like me. They don't want to have to worry too much about money; they want to do the job they are interested in, and they want the money problem to largely go away. Generally speaking, unless you want the employee to sell or, you know, be a business person for you? these sorts of people are far superior to people like me, after equalizing for skill. If you want to keep these sorts of people? offer them raises before they ask. Remove hassles from their lives. help them move. free them from the drudgery of cooking. In short, I think you need to make them feel like /you/ are loyal to /them/ - that's something they value. Doing this while remaining, you know, honest can be somewhat difficult. I dono. I personally try to continue to give some benefits to ex-employees. I give them free co-location for life. I am generous in references. If I have to get rid of someone, I try to find them another job with someone else. One guy who was a contractor for me for a while who left for a larger ISP, well, he got fired from the new job. I had already replaced him, but I've been helping him out with his resume and stuff. I think what these people want is to be treated like friends rather than like resources. Which is kinda interesting, because if you deal with someone like me? I mean, sure, being friendly is great. But I'm going to feel flattered, and think of you as a honest and straightforward person if you treat me as a valuable resource rather than as a friend (I mean, in a business context) Google, I think does a really good job of all of that, and now it sounds like they are also doing a good job of making 'the money problem' just go away. One of my employees told me that he was recently approached by a google recruiter. He said he felt really guilty, like he was betraying me by going to the interview. To me? his feelings are rather foreign. I mean, considering the difference between what google would pay him and what I pay him, no reasonable person would criticize him for jumping to google; if anything the reasonable person would say that he had a right to feel a little offended that I'm paying him so little, when according to google, he's worth much more. But understanding how these sorts of people think and keeping them happy is key to retaining the workers you want long-term. It's a hard thing for a business owner to do, because hey, we're business owners... if we thought that way, we would never have struck out on our own.
whtvr_mike 15y ago
Having worked on the Priceline campaign and with Mr. Shatner, I can tell you he laughed significantly less than halfway to the bank. He cashed in his shares ten years ago, well before Priceline's recent stock blast-off. Your point, however, is valid: he was paid with shares.

by veyron 15y ago

Woost 15y ago

This isn't as simple as "push for equity". There are plenty of companies where equity makes no sense (say, a private consulting company, or a company with no plans to sell a la 37signals) What other options are there? Guaranteed end of year bonuses? Commissions in the form of profit sharing?

mvc 15y ago
Presumably, equity in these companies would be like being a "partner" in a law/accountancy firm.
- tomkarlo 15y ago
  I hope not. If you talk to folks in law, in particular, the partnership system is broken. It basically results in a situation where it's in the interest of the existing "partners" to have as many "non-partner" employees as possible, dangle the carrot of partnership in front of them so they work really hard, but in reality only promote 1% or so to partner. That maximizes the return to existing equity holders but it means life sucks for everyone junior.
  - rayiner 15y ago
    Yet the partner/director carrot in law/banking/consulting convinces tons of Harvard, Yale, etc, grads each year to work 80 hour weeks for their 20s for a shot at equity (which realistically is more like 5-10% at big NYC type places and upwards of 30% in secondary markets).
    - tomkarlo 15y ago
      This is really mostly a law thing - banks and consulting firms, by and large, aren't partnership models any more and haven't been in a long time. Any large bank or consultancy is public now, which means they give equity to employees out of a huge pool and it has relatively little effect on the comp of their managers. That's different from a law firm, where even in fairly large ones the addition of new equity partners can have a material impact on the existing partners' comp. As for making partner in a BigLaw firm, folks I've talked to describe it as "a longshot" to "nearly impossible." A firm like Skadden will hire 500+ new associates a year (worldwide) and name maybe 4-6 partners, not all of whom started as associates. Unlikely the chance of going from associate to partner breaks 1%. (Updated #s after asking someone who worked for Skadden.)
      - rayiner 15y ago
        McKinsey and Bain are incorporated partnerships, and BCG is still an actual partnership. Goldman Sachs, JPM, etc, are public companies, but their investment banking and trading divisions operate very differently from a typical public company. GS, for example, pays out 50% of revenues as compensation, with MDs and PMDs (partner managing director) sharing from a huge profit pool. Internally they function very much like partnerships. As for the chances of making partner, it depends heavily on the firm and the year. Skadden is something of an outlier[1]. The other big NYC firms bring aboard about ~100-120 associates per year, and promote between 5-15 depending on the economy. The last few years it's been around 5 and during the boom it was around 15. At medium-sized firms outside NYC, the %-age is more like 20-35%, though profits-per-partner at those firms are more like $300-500k/year, versus $2m+ at Skadden. [1] Though your numbers seem grossly exaggerated. Worldwide Skadden brought aboard ~200 this year, which was a big crop. The two years before that were ~100 put together. And over the last few years, the partners promoted counts have been: 2007 (29), 2008 (25), 2009 (8), 2010 (6), 2011 (8).
veyron 15y ago
For private companies with no plans to sell, ideally it would be an arrangement where the engineer receives shares (in a C corp) or is written into the operating agreement as a partner (in an LLC or LP) but a profit sharing agreement would have the same effect. In major law firms, the associates aspire to become partners in the firm, which is analogous to my interpretation when saying "equity".
- wanorris 15y ago
  Actually, setting up software firms where the best developers can "make partner" would be quite an interesting approach. I'm not sure it would work, but if it did, it could be a perfect solution for keeping a great team together for the long haul.
  - hammerdr 15y ago
    See: Accenture. It's a consulting company not a product company; it may be significantly different when "making partner" at a product company. However, from what I've heard, each partner at Accenture essentially runs his or her own business within the larger scale of the organization. Success is directly tied to the success of the internal mini-businesses. It is, however, an example of a company where IT professionals can become equity stakeholders in a private firm. I imagine a product company would need to make the partners in charge of one product each (or maybe a couple of partners on one product) in order to avoid the "Too many cooks in the kitchen" problem.
    - mathattack 15y ago
      Though your premise is correct, Accenture is public, not private. They (like many others) wanted to expand beyond pure consulting, and the partners wanted to cash out. Accounting and law firms may be a better example, though even they aren't as entrepreneurial as you think. They have their own regulations and internal politics.
  - wallflower 15y ago
    Most traditional firms, to make partner, you have to be personally responsible for a large amount of business. At Andersen, at one point, I heard the number was $10M/yr of revenue. It would be harder to figure out how much revenue is generated by an individual contributor (even if they are a superb coder). Also, partnership usually involves leadership decisions
tptacek 15y ago
Private consulting companies have all sorts of var comp plans; the most common is profit sharing.
nikcub 15y ago
It is funny that options are now so associated with a company exiting that we totally forget that their original purpose was as an efficient mechanism for profit sharing
- tptacek 15y ago
  I was thinking exactly the same thing, about the parallels between speculative bets on appreciation and dividends.
dmoney 15y ago
I read in an interview that at the end of the year, 37signals takes most of its profits, and pays them as a dividend to its shareholders. I don't know if lay employees get a chance to own stock, but if they did it could be a great incentive.

SonicSoul 15y ago

structuring compensation as base / bonus could also alleviate this. at least that's the carrot finance industry is using to get most performance out of developers even though the bonus is usually exactly what promised/paid last year + n%. but it seems to work (especially around 3rd/4th quarter). but the higher you go, the higher % of your pay is bonus and supposedly tied to co performance. though this is not as good as equity as there is still no real ownership incentive.

veyron 15y ago
"structuring compensation as base / bonus could also alleviate this" <-- I am not convinced. If you knew that your bonus was a percentage of your salary, the only way that it would motivate you is if your salary was low (or if your bonus was extremely large). And for developers, the bonus is generally in the 10-30% of base salary range. There really has to be a variable component depending on the firm profits that isn't capped at a percentage of salary. "though this is not as good as equity as there is still no real ownership incentive." <-- this was the largest complaint to the investment banks transforming from partnerships to corporations (in the former case, the partners were personally liable for losses)

yuhong 15y ago

In fact, I think this problem is even worse in the CEO world due to the legacy MBA culture of greed.

georgemcbay 15y ago

"What engineers really need to do is to put more skin in the game. Push for more equity, even if it means accepting a smaller salary. All too often I see programmers who just want a 9-5 that pays 6 figures" A lot of engineers I know are like this because they were badly burned earlier on in their careers with promises of equity (while working below-market paying job for that equity) that turned into dust (due to massive dilution and other factors) even when the company had a very successful exit. One could argue there they only have themselves to blame for not being sure of the actual value of their position in all possible exit situations, but now you're arguing they shouldn't just be engineers but also financial/contract law experts, which is especially unrealistic when they are just getting out of school.

deleted 15y ago

[deleted]

lsc 15y ago

>What engineers really need to do is to put more skin in the game. Push for more equity, even if it means accepting a smaller salary. I disagree strongly. With that plan, (assuming you corrected the problem that most options at pre-public companies are basically revocable at any time.) you'd end up with a bunch of guys like me; Sellswords who are halfway to becoming a business people. And you know? even if you do keep us for a while, it's not going to be for long; my personal policy, when working for other people, is to always be looking, and jump if someone offers me 20% more. Loyalty? you are paying me 20% below market, how about you show me some loyalty. People like me? we're probably better off running our own companies. Really, if you want the skills people like me have? you are probably best off contracting with our company for the work. The sort of person who likes to be an employee is, well, rather different. They are usually quite risk-averse compared to someone like me. They don't want to have to worry too much about money; they want to do the job they are interested in, and they want the money problem to largely go away. Generally speaking, unless you want the employee to sell or, you know, be a business person for you? these sorts of people are far superior to people like me, after equalizing for skill. If you want to keep these sorts of people? offer them raises before they ask. Remove hassles from their lives. help them move. free them from the drudgery of cooking. In short, I think you need to make them feel like /you/ are loyal to /them/ - that's something they value. Doing this while remaining, you know, honest can be somewhat difficult. I dono. I personally try to continue to give some benefits to ex-employees. I give them free co-location for life. I am generous in references. If I have to get rid of someone, I try to find them another job with someone else. One guy who was a contractor for me for a while who left for a larger ISP, well, he got fired from the new job. I had already replaced him, but I've been helping him out with his resume and stuff. I think what these people want is to be treated like friends rather than like resources. Which is kinda interesting, because if you deal with someone like me? I mean, sure, being friendly is great. But I'm going to feel flattered, and think of you as a honest and straightforward person if you treat me as a valuable resource rather than as a friend (I mean, in a business context) Google, I think does a really good job of all of that, and now it sounds like they are also doing a good job of making 'the money problem' just go away. One of my employees told me that he was recently approached by a google recruiter. He said he felt really guilty, like he was betraying me by going to the interview. To me? his feelings are rather foreign. I mean, considering the difference between what google would pay him and what I pay him, no reasonable person would criticize him for jumping to google; if anything the reasonable person would say that he had a right to feel a little offended that I'm paying him so little, when according to google, he's worth much more. But understanding how these sorts of people think and keeping them happy is key to retaining the workers you want long-term. It's a hard thing for a business owner to do, because hey, we're business owners... if we thought that way, we would never have struck out on our own.

whtvr_mike 15y ago

Having worked on the Priceline campaign and with Mr. Shatner, I can tell you he laughed significantly less than halfway to the bank. He cashed in his shares ten years ago, well before Priceline's recent stock blast-off. Your point, however, is valid: he was paid with shares.