The Insider Guide to Careers
Insider information, secrets and tips about getting hired and building careers. For employees and job candidates.
FAMG companies have skewed compensation numbers in the tech industry worldwide, especially in places like the Bay Area and Bangalore. Most companies are comfortable paying at any number above the 50th percentile. Why do FAMG companies, especially Meta and Google, pay the average employee at the 90th percentile?
I have worked with extraordinary tech companies in the USA, India, and Korea, especially with the compensation teams, to know that any compensation above the 60th percentile is highly competitive to get the best talent. Typically, companies move up to the 70th or 75th percentile to get the creme de la creme of the talent. Any number above this involves overpaying for talent.
Why, then, do companies overpay? Some answers emerged in an all-hands meeting at Google, which happened in March 2022. CEO Sundar Pichai was stumped by one of the employee questions – “If Google aims to hire the top 1% of talent, why doesn’t Google aim to pay the 1% of salaries, rather than being in the top 5%-10% of the market?” While Pichai gave a generic answer, the honest HR answer is that no sensible company pays well above the 90th percentile because the market data is chaotic with lots of noise, few data points, and high spreads. The extreme outliers at the very ends can significantly impact the calculation of the top 5-10%. The answer is not that top talent needs top compensation. The real reasons are listed below.
If you are compensated at mid-market or below-market levels, you can quickly leave for higher compensation in other companies. It becomes tricky when you are paid at the top of the market. If you leave, you may have to settle for lower compensation in other companies. You can see that the compensation morphs into golden handcuffs. Most people tie their self-worth to salary. They frequently refuse offers with better quality of work because the new company pays less.
Revenue model
Companies like Google and, to a lesser extent, Meta and Amazon have extraordinary revenues and profits from just one business – advertising. For example, advertisers in Google search pay 278 billion dollars a year, with close to 162 billion dollars just being generated by Google search. When a standard business generates so much money for little additional investment, Google has a blockbuster revenue machine. It can then afford to spend this extraordinary money it makes on whatever it wants, whether it be moonshot projects or overpaying employees. Most traditional companies, on the other hand, work on wafer-thin profit margins. It is challenging for these companies to pay employees more than the market can support.
The challenge from startups
The actual intellectual capital of most big-tech companies comes from the quality of manpower. The top of the top tier talent are the folks who are the most likely not just to make outlier compensation numbers but also the folks who would go on to be entrepreneurs. The biggest threat to most big-tech companies comes not from government regulation or the existing competitors but from the new technology that entrepreneurs develop. When OpenAI came up with a rival to Google search, Google’s market cap dropped by 100 billion dollars in just one day when its own product, Bard, glitched. Such is the power of competitors. While big tech companies have one of the greatest profit-making products of all time, they can be destroyed anytime by a rival superior product. FAMG companies recognize this very well. The best way to prevent a rival competitor from emerging is to either make them work in your company or acquire the startup before it gets launched to the market.
The easiest and most cost-effective way to prevent competition is to get top talent to work in your company. FAMG companies have done a good job ransacking AI and research labs in top CS programs worldwide. Many top-notch research faculty have been poached to work in mediocre roles as directors, senior directors, and VPs. The intent is often not to gain much productive work from them but to lock them up doing mundane work. This move ensures that they do not create rival products.
Despite all these efforts, many bright employees feel so stultified working in big companies and are so frustrated with red tape that they leave after making some money to create a startup. Many companies quickly grab startups in the seed round, Series A, or Series B rounds to prevent the companies from going public. These acquisitions aim to get the founding team to work with the acquiring company. They rarely target the market or product the acquired company brings along. The idea is to grind the acquired company to dust. Very rarely does M&A succeed. Most acquisitions are a disaster, and the companies being acquired know it. Still, they see this opportunity to make quick money compared to the effort required to make a company go IPO. Acquired company executives have to wait 2-4 years for their stock to vest, based on conditions of M&A. This additional 2-4 years of locking the co-founders is 2-4 years of these folks not doing anything useful, giving the big tech companies a wider safety margin.
The employer-employee contract
It is silly to focus only on monetary compensation. Look at the total rewards package and the benefits. Companies that pay at the 50th percentile may have excellent training and development programs and faster promotions. These other perks are how they get great talent to join their companies. Most people working in big-tech companies know that promotions are very difficult, if not impossible. This fact should be no surprise – no company wants to increase an already lopsided compensation structure further.
The other consequence of high compensation is that you can be the first target for restructuring and downsizing efforts. When Google laid off employees recently, they targeted both low and high performers. If you are confused about why top performers were impacted, the answer is that high performers also make high compensation. Hence, when a team wants to cut labor costs and operating expenses, the highly paid employees are the first on the chopping block. This phenomenon is counterintuitive.
There used to be an employer-employee contract in the past, in the earlier generation, where both sides used to look out for each other, and jobs were till you retired. That era is well and truly gone. In the current age, it is one quarterly financial at a time.
The cons of high compensation
Tech companies are not the only companies offering high compensation. High-frequency trading firms also offer sky-high compensation, including 500,000 USD, to freshers from IITs.
I will reveal a running joke in Silicon Valley, especially within the compensation circles. Companies that pay at the 50th percentile lose people to companies paying at the 75th percentile who lose people to companies paying at the 90th percentile who lose companies to startups (who could give millions of dollars in the paper value of ESOPs). People who burn their hands at startups want work-life balance and, therefore, join companies paying at the 50th or below percentile. Then, the race begins again!!
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