What do great engineering managers need to know about compensation and equity? | Hacker News Reader

What do great engineering managers need to know about compensation and equity?

rubick.com

123 pointswallflower85 comments

The simplest way to manage pay equity is to at least match current engs salary to new hires for the same level. It baffles me that companies are ready to pay new hires market rates, but not try to retain existing talent by giving them the same $$. This gives very little incentive to stay in the company for long time. Engs are most productive when they stay 2+ yrs in a team. We should incentivize folks to stay longer than that.

Simple is not better. It’s better to spend less money from the company’s perspective and also keep information asymmetry about relative pay levels.

Sounds like a recipe for high turnover

Which is often fine with leadership. New employees tend to be more compliant and more malleable to the current leadership’s point of view.

I think the reality is that inertia is a big factor. Changing jobs is not a smooth easy process necessarily. I think companies are fine with a certain percent loss of employees in attrition and if it gets too high they'll start trying to fix it, but not before.

Which is a part of why most software is garbage.

Why would leadership want compliance if it's coming at the expense of productivity? Who cares how obedient the employees are if profits are down?

Engineering productivity doesn't always have a 1:1 relationship with profits in the current quarter, it can take a while for the rot to start to show up in the bottom line - by which time people may have moved on and it's someone else's problem, there may have been an exit, etc.

My guess of why companies don't pay current employees more, is that they believe, correctly or incorrectly, that good talents will naturally rise through the ranks and would be compensated reasonably, while the rest are simply replace-able cogs.

That, and the difficulty of explaining to management/shareholders that they plan on increasing payroll by N% despite not actually acquiring new talent in the process.

At my current company (and I assume in many other companies), this is the main reason for not compensating existing employees fairly.

If my manager (lead of 15 devs) went to his shareholders that we want to adjust people's salaries so that they are more likely to stay longer (let's say this cost 300k a year), they would not approve it even if it meant we could reduce the number of devs leaving from 4 to 2.

If he said we need 300k for hiring two devs, it would be approved without a question.

Back-of-the-envelope math based on European salaries.

Is the current talent worthless? that's what their actions indicate.

The flaw in this is that even if you rise through the ranks, each promotion usually only gets you a 10% raise at most, 15-20% if you’re really lucky. So your initial low comp will continue to haunt you unless you rise to a level where there’s a step change in pay, usually some sort of leadership role.

If turnover is low, leadership will often assume people must be fine with their current compensation, since their data indicates the market continues to clear.

More than once I’ve seen startups go and do a round of comp adjustments after an uptick in turnover.

Companies don't spend time thinking/rationalizing why they shouldn't raise current employees' salaries. They are simply forced to pay market rate for new hire, that's all, no one thinks about "what about our existing employees?"

Sometimes we romanticize tech company too much that we forgot that they are, at its core, just like any other company, and an engineer is just a headcount. Faang sometimes has the ability to steer away from that perception, but it remains true for almost all non-faang. Everyone below leadership is replaceable

>They are simply forced to pay market rate for new hire, that's all

That's kind of tangential to the point of this conversation though. They're forced to do so via turnover rather than proactively raising wages, which hurts them far more in the long run.

Disagree since “good talents” are dependent on the whims of those making that judgement.

I’ve seen people go from “irreplaceable” to “not a good fit” when a new CEO comes in.

I’d argue companies are aware that good talent costs money and they are happy to acquire it internally or externally when the arise needs. If no need, then business as usual.

My experience at $previousjob... Another issue (and argument for job-hopping/frequent job switches unfortunately) is that it's often easier to get a promotion i.e. a higher job title by switching jobs rather than going through a long and bureaucratic promotion process at the same company. (Speaking about simple promotions and not switching to a manager track.)

Trying to put together a promotion packet with items or projects that are often orthogonal to "real daily work" feels daunting. "I need an x type of project or contribution for getting promoted" - while at the same time you might feel that if the company hired you fresh, they could hire you at the next level.

As a manager, how do you determine who deserves a raise and whose hiring was a failure?

If you don't hand out raises automatically then you know that those who change jobs are the ones who would have deserved more. That's an instant loss where you gain nothing from your knowledge. However, if other managers in other companies play the same game, then you have created a tool to judge the quality of your workers.

Chances are the only good way to make your engineers stick around is to keep adjusting compensation to market rates. If an engineer can get a higher salary at pretty much any other company, there's no question if they "deserve" a raise.

I don't think compensation should be used as a reward for effort. If you do that, you'll end up creating an incentive for people to only do stuff that looks great for a promotion -- and people who maintain software and don't create flashy new features will end up being under-appreciated.

If you don't think a person "earns" a raise then they shouldn't be working in your team. In a great team, everyone "deserves" a raise because teamwork is the result of the entire team. If a person pulls that teamwork down then they shouldn't be in that team.

> As a manager, how do you determine who deserves a raise and whose hiring was a failure?

IDK, manage? I let go of anyone who is determined to have been a 'hire [that] was a failure.' I also look back and try to figure out what failed in the hiring process. Luckily I haven't had too many failures, because it sucks to let people go - even if they deserve it. Admittedly, I also have never had to hire at the scale of a FAANG.

>Engs are most productive when they stay 2+ yrs in a team. We should incentivize folks to stay longer than that.

really? I tend to get worn out and bored after 3 years actually.

Months 12-24 is commonly a sweet spot IMO. A year is often enough to understand the domain and problem space well and be empowered to enact complex changes. It might taper off then a bit for some as they get bored or burn out, but a 2+ year tender is going to cover that very productive period and hopefully more.

That usually means you don't have authority (which is also a problem) and forced to solve the same problem over and over again.

For me it usually in 3-6 months I'm able to make complex changes to the existing code. In 12-24 months I'm able to make fundamental changes and demolish some of Chesterton's fences.

It's not just giving more money. If I stay at my current company and ask for a significant raise, that usually comes with more responsibility... Whereas if I just switch jobs, that usually means more money for doing the same.

Sure, but paying someone who's been with you for two years more for the same job still beats paying a new hire more for the same job, which is what often happens in practise.

On a case by case basis yes, but in aggregate many people end up staying because they're risk averse.

The game the company is playing is trying to walk the line where the amount they're underpaying the risk averse who don't leave more than makes up for the turnover cost.

From an engineering perspective we know this leads to worse outcomes in terms of velocity and code quality, but those things are not quantifiable in a way that satisfies the bean counters.

I'm the author of the original piece. Totally agree with this -- it can be quite simple to implement. Increasing retention makes a big difference. Unfortunately, there are more incentives to hire than to retain, so many companies do a poor job of it.

I've been at three companies that have implemented pay equity (and one of those I was the one implementing it). I wrote up a guide to implementing pay equity here: https://www.rubick.com/implementing-pay-equity/ and it's basically as you describe -- have new and existing employees get paid the same rate, with no manager or recruiter discretion.

> Geo-balanced. Pay so that everyone receives the same amount, regardless of where they live. This means the company will pay very different amounts for each employee. For example, costs in one country in Europe can be twice what they are in another country.

This completely caught me off guard the first time I encountered it.

I knew employment taxes were higher in some locations, but I was blown away by how much higher it was in most of our European offices. It was a lot cheaper to hire a $200K/year engineer in our American offices than to pay someone the equivalent compensation in any of our European offices.

The lower compensation reported by many European devs made a lot more sense after that experience.

You also need to understand whether the taxes are paid by the company, the employee or both. In my country the company pays around 10% of the gross salary in taxes, and the employee pays 40%.

The distinction between company and employee payroll taxes is completely artificial. The only thing that matters is that the company pays X and the employee gets Y

Yeah so European employers talk of "gross" pay.

Net: what the employee gets on their bank account

Gross: net + employee contributions

Total payroll cost: gross + employer contributions

This geo-balancing approach described makes little sense.

"It was a lot cheaper to hire a $200K/year engineer in our American offices than to pay someone the equivalent compensation in any of our European offices."

This is not a very good frame of reference to take though ... they are getting paid $200K - what they give to their government is their business, not yours.

If people are paying 'higher taxes' well hopefully they get some benefit from that. If not, well, it's their country to work with.

If you consider that that European may be getting big retirement, more vacation, free Uni, free Healthcare, free Childcare etc. - well - then that's kind of 'part of their comp'.

Also, Supply/Demand is a thing.

True 'Geo Balancing' would imply paying the person what their market rate is, in that market - and - if you're based in a market with higher salaries you can actually pay bit more (i.e. this the 'Supply' part).

I guess what I mean to say is ... the 'comp' should be what goes to the staffer + payroll taxes. In the US it's a small amount. In France, it's a lot.

So you basically end up paying someone in a 'high payroll tax country' less - all other things being equal.

The difference is that in the EU you don't necessarily see the payroll taxes your employer pays (as opposed to the income tax you do see), and those payroll taxes can be very high.

Yes, that's what I meant to imply there at the end, but re-reading what I wrote I did a poor job of that, you 'said it right'.

> This is not a very good frame of reference to take though ... they are getting paid $200K - what they give to their government is their business, not yours.

You’ve misunderstood. I’m not referring to individuals’ own taxes.

Most countries have employer paid taxes on payroll. It’s literally an additional cost paid by the employer for having that person on your payroll.

In several European countries, this employer tax can be a lot higher. It can be much more expensive for the company to hire in those countries at equivalent compensation to the employee . Read the article for some more details.

I didn't misunderstand, I indicated 'payroll taxes' there. It just wasn't clear.

I think a good idea would be to tell employees what their total comp is, and then deduct payroll taxes. Tell them they are being paid 'equivalent' as elsewhere.

This is a solid post, and setting comp is both important and nuanced.

One really important topic that isn't addressed here as part of Compensation Reviews is re-evaluation of equity grants – particularly at times like these when tech equities are falling rapidly. A scenario that I think we will unfortunately see a lot of:

* Employees have equity grants worth $100k/year in equity, with the value based on a fundraise from last summer (not uncommon for senior engineers in tech) * Tech co valuations from last summer were white hot. 50x, 70x, 100x ARR * The market has cooled significantly with valuations at say 6x, 10x, 15x ARR * As a result, the "true" value of employee equity will be way lower than expected * With comp that far below market lots of people will quit

Of course, there's the question of what to do as a manager. Topping up all employees or raising cash comp for all is more fair but also increases burn, which is _exactly_ what VCs or public markets don't want to see right now. Behind closed doors many companies will top-up high performers and tacitly encourage low performers to leave the company.

I was also a bit surprised to see that this post didn't discuss how companies think about and create bands beyond percentiles (example of how many companies approach the creation of bands: https://www.aeqium.com/post/how-to-create-compensation-bands). Using percentiles to determine pay can work, but is typically a lagging indicator, as these sorts of comp benchmarks are based off of surveys that only go out so often. This is especially true in times of considerable compensation volatility like right now –comp for roles like engineering, design, product management, data science have all increased dramatically in the last 3-4 quarters, but this growth will probably slow significantly or even reverse given the current tech market downturn. That's very unlikely to get captured by percentile-based assessments.

Well, since personally I value equity at any private company at $0, you could throw as much “equity” as you wanted and it wouldn’t help retain me.

Parent is presumably referring to public companies. Many of us have a sizable chunk of our compensation coming from RSUs.

How can you “presume” that when they explicitly said…

> Employees have equity grants worth $100k/year in equity, with the value based on a fundraise from last summer?

Yes I have RSUs from FAANG that are down 30% YTD. But when they vest in the next two months, at least I can sell them and diversify and use them for something.

If it were a private company, not so much.

This issue impacts both private and public companies, although indeed my comment did reference a private company scenario. However, you could just as easily replace that language with something like "with RSUs granted last summer" or similar. The issue is going to impact anyone who has a major equity grant set during prior_market_conditions who is now vesting that equity during current_very_different_market_conditions.

Also as you called out the problem is largely worse for private companies.

It’s much much worse. At least with all of the BigTech companies (FAANG - Netflix + Microsoft), they have huge profit generating business and they can pivot to offering more cash (like Amazon did before the crash) or even more stock. No one believes that those five companies will have worthless stock during their vesting periods.

Private non profitable companies are stuck in a catch-22. If they offer more cash they increase their burn rate. If they don’t, their best employees leave and they lessen their chances to ever go public. On top of that, how many VCs will just cut bait and let the business fail? What are the chances that they can get another round of funding and if so, it’s not a down round making it even worse for existing employees?

Yeah I'm with you. A lot of companies are unfortunately going to have a very rough time going forward.

How do you value equity in a public company like Netflix or Shopify? I don't think you're wrong, taking it further it's really hard to value anything but AAMG (not FAANG lol) at face value.

Netflix was always a nothing burger when it came to BigTech. It was the 50th most valuable company before the stock crash. It’s an accident of history (and CNBC) that it was ever included as a FANG stop. Notice the missing “A”? Cramer didn’t include Apple even though Apple was already the most valuable company by then or Microsoft that had been in the top 5 since 2000.

Fortunately for employees of Netflix, all of their compensation is cash.

> Fortunately for employees of Netflix, all of their compensation is cash.

No, but they can choose the mix of stock and cash as they please, from 100% stock to 100% cash.

Is that a recent change? At least to me, Netflix was known to pay the most base salary b/c they didn't believe in giving out RSUs or other stock based comp.

Yup and that's your prerogative, but practically speaking there are many people in the market who do put the expected value of their equity above $0, and they're going to present a retention risk if their total compensation inclusive of equity gets too low. Fwiw this problem exists for public companies too.

And those people don’t know the statistics of how rare it is for any company “succeeding” well enough for their equity be meaningful, how long it takes a company to have an exit (on average 7 years) or how brutal the IPO market can be during a bear market.

The majority of employees at startups have never experienced a bear market.

I hear you, although for better or worse teams somewhat need to manage to their employees' expectations and perceptions as well as the statistics on startup survival and liquidity. There's also a wide spectrum for the probability of a profitable liquidity event based upon scale, market, stability, etc...

Would you suggest companies clawback equity when it over performs?

I see this argument a lot: companies shouldn’t offer more equity in a down market because employees wouldn’t be willing to give back equity if they were up significantly.

It doesn’t matter if this situation is “fair” though. What matters to the company is people will quit if they’re making half of what they expected to make.

This is exactly right. In some situations it's a matter of practicality not morality. Anyone compensated in equity in large part needs to be willing to accept some share price volatility, but at a certain point people are going to leave and the company has to be proactive about that.

re-pricing of options or an exchange [1] is indeed a very important aspect of compensation of private companies. While public companies value options based on publicly reported figures (and are restricted by NYSE/NASDAQ), private ones have to follow set rules in the 409a [2].

[1] https://www.shearman.com/perspectives/2020/03/revisiting-sto...

[2] https://www.loeb.com/en/insights/publications/2007/05/sectio...

None of this is in the control of the average engineering manager. Seriously, 0%.

This guide explicitly mentions it’s for “great” engineering managers, not average ones.

I know you think that was a dig, but all your comment did was expose how little you know about engineering management. Unless you are trying to infer that there are 0 "great" eng managers in existence.

Clearly average eng managers also dont read articles before posting bc this was covered in there nor have any sense of humor

Agree. While it's great that the engineering manager understands engineering compensation and the nuances between different models, it's the HR departments that need to be educated on engineering compensation. Especially in organizations that include a high share of non-technical workers, the divide between engineering vs. non-engineering will be huge. Even standard benchmarking models compare companies based on the city & commute time instead of a whole region, country, continent.

It depends on the size of the company, and how deeply HR has managed to force their influence. Most companies under maybe ~1000 (give or take a few hundred) people, the managers still have some influence. Even a few large companies that are careful manage to stave off the HR influence for a little while. But yes, outside of that managers have very little actual influence.

I'm the author of the piece. Yes, that's very true.

There is a difference between what you can control and what you can influence. By understanding how it works, you increase you chance of influencing things.

The salary review is something that the average engineering manager can use to both understand this all better, and more importantly, to address mistakes or issues in their team's salaries.

> This is complicated, because engineering titles are not equivalent across companies. A senior engineer at Company X does not equal senior engineer at Company Y. So these companies have detailed ways you can map your titles to theirs.

Exactly why we created https://levels.fyi. While the site is mainly intended for job seekers, we've seen a lot of engineering managers use it as a tool to benchmark their offers and conduct compensation reviews.

A lot of startups nowadays tend to offer multiple options when sending candidates offers. They'll create a slider that allows you to adjust base salary against equity proportional to a target total compensation value with a minimum base requirement (I know even large companies like TikTok do this). You can go base heavy, equity heavy or somewhere in between. It gives candidates the flexibility to choose what to optimize for which is pretty nice.

Thanks for building one of the best resources I've seen for transparency into engineering compensation!

One of the gripes I have as a Canadian is that it's never clear to me whether the salaries listed by Canadian residents are in USD or CAD. I assume USD since levels appears to normalize all other salary information globally into USD.

But it seemed like this wasn't entirely clear at the point of submitting salary/offer details.

We do show everything in USD by default, however on our location specific pages we have a currency toggle at the top to switch between CAD and USD: https://www.levels.fyi/Salaries/Software-Engineer/Canada/

Definitely appreciate the feedback, we're working on better localization features as we speak!

A little bit off on the equity section, and unnecessarily low contrast (why?!), but in general a good and pretty comprehensive primer. One bit of opinion that was injected, that I disagree with:

> Cost of replacement. Compensation increases can be justified based on proving you could make more by going elsewhere. This perversely [emphasis mine] incentivizes people interviewing outside the company. Netflix is famous for this approach.

Why is such incentivization perverse? It's really great for employees to know what their market value is. It stops you from doubting if you are worth more, it gives you the warm fuzzy that you are actually being paid fairly, and that your employer is essentially making a guarantee to pay you fairly. It also is great to be somewhere that is so confident of their ability to retain you, that they encourage this. I'd say this is the opposite of perverse.

No comment on Netflix otherwise, but this approach to pay is extremely fair, extremely transparent, and so IMO extremely desirable.

This approach does, however, require work on your part if you are to take advantage of it. It's not for everyone.

Forgive me if I'm stating the obvious, but it's a perverse incentive from the company's point of view. By the time the employee has gotten to the stage of getting actual offers from other companies, they've already gone through all the friction of the job hunt; at that point, the path of least resistance is in fact for them to leave the current job, otherwise they have to go through the new process of getting a counter-offer from their employer, with all the risks that involves too.

I don't find that perverse. Netflix is confident that they offer both top of scale pay, and top of scale satisfaction. And they want their employees to be happy. That kind of employee is maximally productive. They actively want to get rid of less than dedicated, top performers.

Yes, if you are in a weak position as employer, not confident of your ability to retain employees, it is perverse. Or if as an employer, you don't judge quality of employee so much as long as you get SOME output from them.

Your argument amounts to: unsatisfied employees shudder might leave, or even worse be encouraged to leave by this policy. I believe that Netflix actually desires that. Unsatisfied employees are not maximally productive employees. We can see this in their recently updated culture deck -- "if you don't like it here, don't let the door hit you on the way out."

As well, the mere projection of such power (encouragement to seek outside offers) is enough to keep most employees satisfied that their employer is paying them, and every one around them, fairly. Without them having to act on it.

> Engineers are fortunate to be an industry with high demand.

We’re in high demand because we produce high value. Companies are fortunate that engineers exist.

Engineers can automate tasks that would otherwise require an entire department, but we're "lucky" to be in demand? Functional businesses profit immensely from hiring competent engineers, this is why we're in demand.

Yeah. This is like, "it was a miracle she survived the car crash!". No, it was the hard work of engineers.

That a good engineer can negotiate a 30+ percent raise at another company if they're not adequately compensated.

This is probably true even if you scratch "good" and the "not adequately compensated". Everywhere seems to budget for hiring and retention separately and moving exposes that gap.

Paying people "fairly" seems to mean "years of experience" multiplied by some factors based on the individual.

This means a talented junior gets screwed and leaves, and the one year twenty times over crowd stay forever.

I went through a pay review where I was apparently too far up the curve for my age and that wasn't fair, so I got less than my colleagues that round. That's a conversation you only get to have with an engineer once.

I’m the author. I would never advocate for pay levels to be based on years of experience personally.

The US Federal Government has had managed pay forever.

The way it works is, no matter how good you are or how skilled you are, your pay is primarily driven by other factors, such as time in grade.

Very rarely, a superstar performer will get accelerated promotion, but much more often, top performers will leave for greener pastures and give themselves a raise.

Over time this means the people retained are the bottom tier to mediocre performers.

It is simply assumed that turnover is inevitable to a high degree, and not blamed on a single manager. However hiring is direct responsibility of the manager.

I wish my manager(s) would read this post and gave it some thought… for companies in SE Europe these things don’t even exist :-(

So we’re calling HR People Ops now?

They’re trying anything to make themselves look like they give a fuck versus what they actually do when push comes to shove

Only compensate people a lot after you can tell they are contributing substantially. Otherwise it’s just throwing out money/equity. Also in general you should try to pay people the least amount that keeps them productive, engaged, and on the team. It also works well to hire very skilled people from other countries that pay lower. Speaking as a startup founder.

To offer a different perspective, I was an early engineer at a startup with strong talent that followed this playbook. Things were fine until I realized upon interviewing for fun that I was massively underpaid (2-3x). I was pretty young at the time, and instead of talking with the founders about the gap, gradually grew resentful and left the company.

I’m now on the on the other side of the table, and we pay everyone handsomely but keep the team lean while expecting everyone to operate at a very high level. Not every startup can or should do this, but I feel strongly this is a much better model for retaining talent while balancing cost to the company.

I can completely understand where you are coming from, but also speaking as a startup founder, i would propose another perspective, efficiency wage theory:

“Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit.” https://www.investopedia.com/efficiency-wages-5206757

While indeed the startup may be incentivized to “pay people the least amount” as long as they fulfill their tasks and keep them in your team; in the long run this amount would normalize to be market (even barely over market) prices. Otherwise you would be left behind and would have to keep spending capital in the overhead of hiring and training new people, which is less productive than having someone trained and motivated.

Maybe you didn’t mean it in that way, but I would strongly recommend against playing chicken with the wages of your employees and testing how low you can go and still get applications. I believe doing this will fill positions with people that are not skilled enough to get a better paid job (or have high rotations), and usually that means that your company is going to move slower than your competition.

I always thought these kind of things give rise to efficiency founder theory which posits that founder-induced prosperity needs to be maintained well beyond the level where lesser companies "pay people the least amount that keeps them productive, engaged, and on the team."

This is what you will be known for.

If you're just going to start up more of those kind of companies, why even bother?

Quite a good analogy there about "playing chicken", these are your people so why not want the best for them that you can possibly offer.

I find I contribute more after I get paid better, not before. It's hard to work when you're thinking about how high the rent is.

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