Breakdown of Tech Compensation

Stock Options, RSUs and Bonuses

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Mansa Musa I of Mali, the West African Emperor is famed as the richest human to ever live. He is known to the world by his pilgrimage to perform Hajj in which he gave away so much gold in Egypt he accidentally ruined the economy for the next twelve years. Additionally, he had a habit of giving his subjects gold and supplies to start families within North Africa during his pilgrimage. Now either by force or choice, we are in the Americas. Particularly the US of A. We have a new Mansa, named Jeff Bezos. Mansa Musa used gold as a display of his power and wealth; Bezos has Amazon as his. Owning companies are the way people display wealth today, tech companies are the Créme de la Créme of companies to own. Bezos and his associates, Jobs, Zuckerburg, Hastings, Randolph, Page, and Brin; all founded tech conglomerates that thousands vie to work for every day. Mainly due to the total compensation package being substantial, to say the least.

Ignoring the pay packages, tech company perks have earned them fame in their own right. Free food, busing to and from work, beer taps, massages, private company jets … I could keep going but you get the point. The perks are normalized to such a point that Venture-backed startups all seem to offer “basic” level perks such as free lunch for employees. It is an effective business strategy, makes your workplace enjoyable thus employees stay longer hours and are more productive.

As great as the perks are the tech salaries are even better. When we discuss tech salaries, we usually are focused on Software Engineering or Product Manager roles. For example, the starting salary for Software Engineers or “SWEs” at Google is $126,000 a year. Google is currently named Alphabet but for the rest of this article, it shall still be referred to as Google. This isn’t their total compensation. In addition to the salary, a new grad or entry-level SWE can expect stock offers as part of their yearly salary. This is valued at around $41,000 a year. Finally, the last piece of compensation is a yearly bonus which reported to be $20,000. Making the total compensation of a new grad SWE ~ $188,000 a year. Product Managers or “PMs”, are paid around the same for entry-level roles. This paradigm is by no means only for these fields, other roles such as Data Scientists and Product Designers both offer very lucrative compensation packages. All of this compensation data is from levels.fyi, which is basically Glassdoor but focused on technology companies.

Google’s compensation packages aren’t the exception but the norm. At least amongst FAANG companies. Popularized by Jim Cramer and idolized by techies everywhere, FAANG is the best performing technology companies on the stock market. They include Facebook, Amazon, Apple, Netflix, and Google. These compensation packages are the reason why every techie you know owns either Cracking the Coding Interview or Cracking the PM Interview. 

Let’s dive deeper into the different forms of compensation.

Firstly, we have a salary. The standard yearly amount of money you will earn. Salaries for tech companies and in particular software companies are high due to the low cost of building software. In previous, articles we went through the ease of building a No Code product. In theory, you can launch a No Code software company in a few hours and start making money. Spending a little less than $20 a year. As your company grows you can hire a Software Engineer to add more features to your product. Due to the lower operating cost, you can afford to pay them more money. Mainly to keep them from leaving for a competitor or starting a new company this is your competitor.

Arguably more important than salary in the stock compensation offered. Bezos famously pays himself $81,000 a year in salary. Most of his wealth is in the form of stock. Employees of public companies such as Google or Microsoft will get RSUs or Restricted Stock Units as a part of their compensation. Actually, I would argue that it is the most important aspect. As you rise within the company, your salary doesn’t increase as much but your stock unit amounts do.

Using the entry-level compensation from above. $126,000 base salary. The RSU amount is $164,000 which follows a 4-year vesting schedule. Amounting to receiving 25% of your total stock every year. When your stocks vests that mean you can now sell your stock for cash. That is the $41,000 stock you’re receiving each year. Since this is apart of your compensation you keep receiving this as long as you’re employed with the company. If you’re an excellent performer you can get a “stock refresher”, in which your RSUs will be recalculated for you to receive more.

Analyzing the compensation of a Senior SWE at Google we can see how important RSUs are for compensation. According to data from levels.fyi, a Senior SWE would earn approximately $184,000 in salary. That's a $40,000 increase from when they were an entry-level engineer. However, their RSU amount increased to $524,000 on a 4-year vesting schedule. That’s a $360,000 increase. As your job companies and rise in positions, your RSU offers can increase to the millions.

Of course, after your money vests, you have to pay taxes on your stocks because that is technically income. Now that is how public companies offer RSUs as compensation. Private companies may offer RSUs as compensation. It follows the same plan, you get the amount and wait for the vesting date. However, once it vests you have to pay taxes. But you can’t sell your stock since your company is still private. That results in you having to use your salary to pay taxes on your stock. Technically, you can sell your private stock using a secondary market such as Nasdaq Private Market. However, those markets aren’t always available, large, or easy to use. But no one wants to be in the situation to figure out if they can in fact sell their stock or not.

Private companies have come up with two solutions to that problem. Either they offer double-trigger vesting or stock options. Double-trigger vesting is set up as two conditions must happen for your RSUs to the vest.

1. Vesting schedule date arrived

2. The company is public

The other option private companies use is to offer stock options. Stock options are when you can purchase your company stock for a price they set at a given time. It can have a major upside if you purchase stock and expect the stock price to increase by the time the company goes public. If your company never goes public or never gets acquired it’s safe to say that the options were useless. Note there are two types of stock options, non-qualified stock options “NSOs” and incentive stock options “ISO”. For the sake of brevity, ISOs are generally better due to a lower tax requirement for being issued. Either way, if you are issued stock options you’re going to need a tax professional to assist with your taxes.

Airbnb employees find themselves in a peculiar situation around this. Airbnb was scheduled to go public this year. They were given stock options but now that the COVID crisis has devastated the company, the CEO even states he isn’t certain if they can go public this year. Which makes their stock options useless until the company IPO.

To wrap up the final forms of compensation; bonuses, insurance plans, and 401k. Your bonus is largely performance-dependent. Most tech companies offer a yearly bonus, some companies such as Intel offer quarterly bonuses as well. Health and Dental insurance are offered. But this is a heated and deep subject we can’t dive into that in this issue. Finally, we have our 401k. 401k plans are your company’s stock offerings but placed into a retirement account that you can’t access until you’re 59.5 years old. Don’t let companies fool you into believing they offer stock as compensation if they are only referencing a 401k plan, its not the same thing or as beneficial as stock options or RSUs.

Due to not having access to these types of jobs for decades, a lot of Black families are unaware of the compensation packages that exist. Particularly the norms of compensation within the tech industry. If you got something out of this issue or know someone who will, please subscribe and share.