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People decry the greed of financial sector employees, but one of the best things about moving there from silicon valley was that people had a pretty good idea o

People decry the greed of financial sector employees, but one of the best things about moving there from silicon valley was that people had a pretty good idea of their worth as a proportion of the firm's balance sheet. I really appreciated that compensation expenses on the balance sheet of a typical investment bank are fixed at 37-39% throughout the year, with the delta between salary and allotment being paid out as bonuses. It significantly improved my income. I would gladly work at a tech company with a similar incentive structure, and I think more engineers should start asking for it. Financiers get paid a lot in the form of bonuses, but the correct answer is not to daisy cut by hollowing out their income. We should be asking why tech employees don't also make the same kind of revenue. When Google and Apple have profits per employee of over $1M but the average engineer salary is only slightly higher than $100K according to glass door while both these companies are building stockpiles of cash holdings, something is obviously broken. I suspect part of it is the 'doing it for passion' mantra, but another part of it was Apple HR's now obviously crooked refrain of 'we pay the prevailing market wage'. Just because I'm doing something I'm passionate about doesn't mean I like getting ripped off.

justincormack 13y ago
Presumably this whole cartel was around trying not to get where investment banking and other areas are. Many of those companies (like Goldman Sachs) were once partnerships, where paying out a lot of income is normal. It may take tech companies a while to get there as there is huge level of founder and VC control in most companies and they want payouts rather than employees getting them.
tomp 13y ago
In investment banking, your bonus is based on the profit generated by (1) the company as a whole, (2) your team, and (3) yourself. In tech companies, all but the first one are usually 0.
- refurb 13y ago
  Exactly. Bonuses based on profit generated a much easier to calculate when each employee (or groups of employees) have a direct link to the profit generated. In addition, the profit generated in banking comes in clearly delineated lumps, i.e. you work on a deal that has a start and an end with a short timeframe. If you're a tech person, how do you determine how much of the profit was generated by that one person? Also, how do you pay based on profit generated when the profit is spread out over the life of the product?
  - pixelcort 13y ago
    For each engineer's new feature/enhancement, A/B test it and use the result in bonus calculations.
    - chii 13y ago
      so which engineer is going to do all that backend stuff? Database upgrade testing? Or sysadmin related tasks? Stuff that customers don't directly see? Coz that bonus calculation scheme is going to net them nothing.
- nerfhammer 13y ago
  startups. Google and Apple are huge money-printing machines, not startups.
  - stretchwithme 13y ago
    Yeah it would run profitably for years if you gutted R&D. How much profit per employee is not the right way to approach compensation. It should and often is based on what it will take to keep an employee happy.
    - nerfhammer 13y ago
      Look at the growth rates of their cash hoards -- none of that is being spent on R&D.
birken 13y ago
While I don't agree with the wage-fixing thing, I can tell you that the "average engineer salary slightly higher than $100K" at Google is not even close to true. When I worked at Google 7 years ago, in the heart of this controversy (IE when salaries were theoretically depressed), as the lowest level engineer just out of college, my salary after bonus was over $100k. Any current mid-level engineer will probably be making between $200k-$300k in total monetary compensation from salary/bonus/stock. And this isn't counting the tons of other benefits (cadillac health coverage, free food, generous 401k matching, etc). I'm not trying to be a shill for Google here, but I think it is a little misleading to say Google is hoarding all of this money and making their engineers live on pennies. The engineers are paid well, and while they (and other tech companies) don't have the partner-type structure, there still are competitive forces driving wages up (assuming the companies are generating profits and can afford it). And... if an engineer wants a partner type structure, they can always just quit and found a company where the wealth accumulates for them just as directly as it does in finance.
- ijk 13y ago
  It's not just about Google, et al. At this scale, it affects the workers down the chain. Maybe the Google employees were getting $250K instead of $500K, which meant that companies downstream could get away with offering less, because they didn't have to get in a bidding war with those upstream. Something this big clearly had effects on salaries across the board, at a scale where its difficult to casually judge the exact effects. Would wages everywhere be higher if it wasn't for this? I don't know, but I don't think we can rule out the possibility.
  - ericd 13y ago
    The thing is, it takes some incredible network effects that require a company at scale or an extremely fat market to generate this kind of money per employee, it's not like most smaller companies are holding back. At that point, the infrastructure of the company is creating a lot of that value - the same engineer at another company would not generate nearly the same amount of revenue.
- walshemj 13y ago
mbesto 13y ago
> When Google and Apple have profits per employee of over $1M but the average engineer salary is only slightly higher than $100K according to glass door while both these companies are building stockpiles of cash holdings, something is obviously broken. Liar's Poker[0], here we go again. This is the exact sentiment that plagued the finance industry in the 80's and lead to the bonus fiasco that exists today on the Street. The question is what do we do about and is it the same? (I don't have an answer, just curious) A couple of interesting notes: 1. In Raghuram Rajan's HAS FINANCIAL DEVELOPMENT MADE THE WORLD RISKIER[1]? he notes: Therefore, the incentive structure of investment managers today differs from the incentive structure of bank managers of the past in two important ways. First, the way compensation relates to returns implies there is typically less downside and more upside from generating investment returns. Managers therefore have greater incentive to take risk. 2. Daniel Pink talks about the Candle problem[2] and two main points on his thesis: - As long as a task requires only mechanical skill, bonuses work as they would be expected – the higher the pay, the better the performance. - Once a task calls for even a rudimentary amount of cognitive skill, a larger reward often leads to poorer performance. [0] - http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/dp/B003E20ZRY/ http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/d... [1] - http://www.nber.org/papers/w11728 http://www.nber.org/papers/w11728 [2] - http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surprising-science-of-motivation/#.Uy3mDa1dXF4 http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surp...
Zigurd 13y ago
In theory, the engineers have incentive option plans with vesting terms that provide incentives that make them work cooperatively, and make the company more valuable, and less brittle, than an ibank. It is often suggested that ibankers receive their bonuses some years out from the year they earned them, otherwise there is an incentive to load up on future risk. In practice, it looks like tech companies were able to avoid wage competition through collusion, while keeping their workers hopefully waiting for the option payout. If collusion like this gets appropriately punished, wages should get bid up, along with option incentives. An ibanker like compensation might work at a "hits" business like a casual game company, where there is strong reason to believe that whatever confection you are coding on this year isn't going to last beyond the vesting period for your initial option grant. If you overtly reward making hay while the sun shines, there would be less bitterness when it gets cloudy.
- wtvanhest 13y ago
  Ibankers broker financing rounds and acquisitions, they don't load up on risk because they don't actually own anything.
alecco 13y ago
It's high time we make an International Programmer's Union.
- kabdib 13y ago
  Periodically there are attempts to unionize engineers in Silly Valley. I've never seen one come anywhere close to success. Most of the engineers I've worked with have seen unions as rent-seeking organizations that simply want to line their own pockets. (There are similar periodic attempts at licensing software engineers at the state level in CA. These generally don't go well either, and appear to be the same kind of rent-seeking behavior as unions, judging from the howling nonsense proposed as core competencies to test against, e.g., lots of EE knowledge, and stuff involving obsolete technology and software development models that don't work).
  - alecco 13y ago
    Maybe it must be done by people from the trenches.
- kevinpet 13y ago
  No offense to you personally, but whenever I see someone proposing a union of any kind, if it doesn't involve real safety issues, I see someone trying to hold down those who can excel and protect themselves from more competent up and coming competition. It's a barrier to entry and control by seniority, period.
  - eli_gottlieb 13y ago
    You don't think it's a logical response to companies colluding to hold down salaries?
    - bm1362 13y ago
      Looks like the law has a proper response?
- CamperBob2 13y ago

justincormack 13y ago

Presumably this whole cartel was around trying not to get where investment banking and other areas are. Many of those companies (like Goldman Sachs) were once partnerships, where paying out a lot of income is normal. It may take tech companies a while to get there as there is huge level of founder and VC control in most companies and they want payouts rather than employees getting them.

tomp 13y ago

In investment banking, your bonus is based on the profit generated by (1) the company as a whole, (2) your team, and (3) yourself. In tech companies, all but the first one are usually 0.

refurb 13y ago
Exactly. Bonuses based on profit generated a much easier to calculate when each employee (or groups of employees) have a direct link to the profit generated. In addition, the profit generated in banking comes in clearly delineated lumps, i.e. you work on a deal that has a start and an end with a short timeframe. If you're a tech person, how do you determine how much of the profit was generated by that one person? Also, how do you pay based on profit generated when the profit is spread out over the life of the product?
- pixelcort 13y ago
  For each engineer's new feature/enhancement, A/B test it and use the result in bonus calculations.
  - chii 13y ago
    so which engineer is going to do all that backend stuff? Database upgrade testing? Or sysadmin related tasks? Stuff that customers don't directly see? Coz that bonus calculation scheme is going to net them nothing.
nerfhammer 13y ago
startups. Google and Apple are huge money-printing machines, not startups.
- stretchwithme 13y ago
  Yeah it would run profitably for years if you gutted R&D. How much profit per employee is not the right way to approach compensation. It should and often is based on what it will take to keep an employee happy.
  - nerfhammer 13y ago
    Look at the growth rates of their cash hoards -- none of that is being spent on R&D.

birken 13y ago

While I don't agree with the wage-fixing thing, I can tell you that the "average engineer salary slightly higher than $100K" at Google is not even close to true. When I worked at Google 7 years ago, in the heart of this controversy (IE when salaries were theoretically depressed), as the lowest level engineer just out of college, my salary after bonus was over $100k. Any current mid-level engineer will probably be making between $200k-$300k in total monetary compensation from salary/bonus/stock. And this isn't counting the tons of other benefits (cadillac health coverage, free food, generous 401k matching, etc). I'm not trying to be a shill for Google here, but I think it is a little misleading to say Google is hoarding all of this money and making their engineers live on pennies. The engineers are paid well, and while they (and other tech companies) don't have the partner-type structure, there still are competitive forces driving wages up (assuming the companies are generating profits and can afford it). And... if an engineer wants a partner type structure, they can always just quit and found a company where the wealth accumulates for them just as directly as it does in finance.

ijk 13y ago
It's not just about Google, et al. At this scale, it affects the workers down the chain. Maybe the Google employees were getting $250K instead of $500K, which meant that companies downstream could get away with offering less, because they didn't have to get in a bidding war with those upstream. Something this big clearly had effects on salaries across the board, at a scale where its difficult to casually judge the exact effects. Would wages everywhere be higher if it wasn't for this? I don't know, but I don't think we can rule out the possibility.
- ericd 13y ago
  The thing is, it takes some incredible network effects that require a company at scale or an extremely fat market to generate this kind of money per employee, it's not like most smaller companies are holding back. At that point, the infrastructure of the company is creating a lot of that value - the same engineer at another company would not generate nearly the same amount of revenue.
walshemj 13y ago

mbesto 13y ago

> When Google and Apple have profits per employee of over $1M but the average engineer salary is only slightly higher than $100K according to glass door while both these companies are building stockpiles of cash holdings, something is obviously broken. Liar's Poker[0], here we go again. This is the exact sentiment that plagued the finance industry in the 80's and lead to the bonus fiasco that exists today on the Street. The question is what do we do about and is it the same? (I don't have an answer, just curious) A couple of interesting notes: 1. In Raghuram Rajan's HAS FINANCIAL DEVELOPMENT MADE THE WORLD RISKIER[1]? he notes: Therefore, the incentive structure of investment managers today differs from the incentive structure of bank managers of the past in two important ways. First, the way compensation relates to returns implies there is typically less downside and more upside from generating investment returns. Managers therefore have greater incentive to take risk. 2. Daniel Pink talks about the Candle problem[2] and two main points on his thesis: - As long as a task requires only mechanical skill, bonuses work as they would be expected – the higher the pay, the better the performance. - Once a task calls for even a rudimentary amount of cognitive skill, a larger reward often leads to poorer performance. [0] - http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/dp/B003E20ZRY/ http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/d... [1] - http://www.nber.org/papers/w11728 http://www.nber.org/papers/w11728 [2] - http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surprising-science-of-motivation/#.Uy3mDa1dXF4 http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surp...

Zigurd 13y ago

In theory, the engineers have incentive option plans with vesting terms that provide incentives that make them work cooperatively, and make the company more valuable, and less brittle, than an ibank. It is often suggested that ibankers receive their bonuses some years out from the year they earned them, otherwise there is an incentive to load up on future risk. In practice, it looks like tech companies were able to avoid wage competition through collusion, while keeping their workers hopefully waiting for the option payout. If collusion like this gets appropriately punished, wages should get bid up, along with option incentives. An ibanker like compensation might work at a "hits" business like a casual game company, where there is strong reason to believe that whatever confection you are coding on this year isn't going to last beyond the vesting period for your initial option grant. If you overtly reward making hay while the sun shines, there would be less bitterness when it gets cloudy.

wtvanhest 13y ago
Ibankers broker financing rounds and acquisitions, they don't load up on risk because they don't actually own anything.

alecco 13y ago

It's high time we make an International Programmer's Union.

kabdib 13y ago
Periodically there are attempts to unionize engineers in Silly Valley. I've never seen one come anywhere close to success. Most of the engineers I've worked with have seen unions as rent-seeking organizations that simply want to line their own pockets. (There are similar periodic attempts at licensing software engineers at the state level in CA. These generally don't go well either, and appear to be the same kind of rent-seeking behavior as unions, judging from the howling nonsense proposed as core competencies to test against, e.g., lots of EE knowledge, and stuff involving obsolete technology and software development models that don't work).
- alecco 13y ago
  Maybe it must be done by people from the trenches.
kevinpet 13y ago
No offense to you personally, but whenever I see someone proposing a union of any kind, if it doesn't involve real safety issues, I see someone trying to hold down those who can excel and protect themselves from more competent up and coming competition. It's a barrier to entry and control by seniority, period.
- eli_gottlieb 13y ago
  You don't think it's a logical response to companies colluding to hold down salaries?
  - bm1362 13y ago
    Looks like the law has a proper response?
CamperBob2 13y ago