
Tech salaries are risk premiums - mooreds
https://phildini.dev/tech-salaries-are-risk-premiums
======
irjustin
> Here’s where we reach our very strange conclusion. If we take the above as
> true, then every family member you convince to buy an iPhone or use Gmail or
> subscribe to Amazon Prime is contributing some small percentage to your
> salary increases at Random Startup, Inc. Which is a fascinating, if deeply
> disturbing and perverse, incentive.

If we're extrapolating, this is just saying growing market means growing jobs?
I don't know why this is disturbing or perverse.

The opposite is true, if people stopped buying iPhones all those people who
support iPhones would be out of a job.

If one whole industry stops hiring then of course the premiums go down. The
supply is huge and the demand is low.

Sorry, I feel like this article is taking something simple and making it sound
complicated and insightful without necessarily bringing a new insight?

~~~
joeyrideout
This article left the same exact taste in my mouth (eyes?)

The author has roughly described the concepts of wage inflation and supply-
and-demand (for workers, in one industry, and for consumer goods), and reduced
almost everything to "risk premium". Risk is everywhere in the economy, yes.
The word "premium" implies additional cost over and above a base cost, which
encompasses many more factors.

Edit: To be fair, I'm glad that the author and some readers are excited about
learning new concepts. I have many similar blog posts written, though
admittedly they stay in my drafts folder if I feel they aren't contributing
significant insight :)

~~~
gandutraveler
This happens to me too. I read a new concept or a book apply it to some real
world problem and I am almost certain that my new hypothesis is the new Nash
theory. Only to re-read it the next day to realize how I overcomplicated my
hypothesis just to fit the case.

------
moosey
Tech salaries are high for a number of reasons: programmers are highly
productive, reducing the amount of work that others must do, the job is hard,
and requires basically autodidacts to do it. The personality traits for being
a good programmer, I think, are rare. There are a whole suite of poorly paid
positions in the United States that are similarly difficult and not as highly
paid as they could be: teachers, for instance.

But why do we even discuss it when there is a whole cohort of salaries that
actually make no sense in comparison: All of the VP's, CEO's, etc... even
stock holders just wasting efficiency collecting dividends from existing
wealth and the productivity of others. Why are tech people trying to defend
their salaries when we could just point at the next people up the chain?

~~~
Jagat
You're saying that programmers have a unique set of skills which is why
they're paid so much.

And in the next sentence you're questioning why CEOs get paid so much. A good
CEO or CFO or CMO can generate value for the company at a scale that's much
much larger than what a single programmer does.

During Satya Nadella's reign as the CEO, Microsoft went from people
speculating its impending demise to a trillion dollar company. Don't you think
he deserves a billion from that $700bn rise in market cap?

TSLA stock will tank the moment Elon Musk decides to step down? In a cynical
world, maybe he's just a figurehead and there are others running the show
behind the scene, but creating such persona is still something that a CEO has
to do.

This is the same old Tesla vs Edison discussion. It's a common misconception
among people that it's enough to be a genius lone worker to be able to provide
value to a company.

~~~
mcv
Thing is, bad CEOs that drive their company into the ground still get paid way
more than we do. Terrible managers often get paid more than the talented
people working under them. Salaries are determined more by power than by
supply and demand. Also by supply and demand, but more by power. People who
wield power get paid more, even if they're bad at it.

~~~
ChuckNorris89
Bad CEOs get paid a lot since if they fuck up, their failures are public and
nobody will hire them afterwards so they need the money as insurance.

If you're a bad programmer, your failures aren't public and you can job hop to
the next gullible company.

~~~
mcv
They don't _need_ the money; their pay is already more than enough to retire
from. Also, a bad CEO needs to fail spectacularly to not get hired. Plenty of
mediocre CEOs keep getting hired for insane salaries.

------
rahimnathwani
Tech salaries aren't risk premia:

If tech salaries were risk premia, you would expect the expected value
(weighted average over all foreseeable futures) of compensation packages at
startups to be higher than those at established tech giants. This might be
true, but it doesn't seem obvious: there are often comments on HN doubting the
claims of high packages at tech giants, suggesting the commenters _aren 't_
getting paid more at their more risky (p(fired | laid off | shutdown)) jobs.

Software engineering salaries are high because there's competition for the
'best' software engineers. In a competitive hiring market, the absolute upper
cap on compensation is the marginal contribution of an additional engineer,
less some percentage to account for uncertainties. That marginal contribution
is high at the largest tech companies, so salaries are high. Other companies
can either pay high, too or, if they can't use a software engineer as
efficiently (e.g. because they don't get as much leverage from software, or if
their engineering is poorly managed), they won't be willing to pay the market
rate.

~~~
acslater00
Correct, the author is describing the effect of a competitive, liquid talent
market. The other dynamic he correctly identified was asymmetry in switching
costs (cheap for me to quit my job and go work at Google, expensive for Google
if I quit and leave some project in the lurch). But he didn't call it this,
and it's not a risk premium per se.

~~~
rahimnathwani
Yes, there's a competitive, liquid talent market.

I don't buy the part about asymmetry of switching costs. It's possible to
argue that asymmetry exists in the opposite direction: each employee has one
job, so switching jobs is time-consuming and risky; Google has thousands of
engineers who have had the same training/experience on internal
tools/standards, so it's easy to replace a single engineer when they leave a
project.

The other point I made is analogous to Baumol's cost disease except that,
instead of applying to different types of job, it applies to different types
of employer.

------
grumple
> If AppAmaGooFaceSoft ever stops hiring, if one day the heads of recruiting
> at those companies say “Nope, that’s it, we’re done, full house over here”
> then the ripples in tech salaries will be felt across the whole industry.
> Salaries will be driven down, because working at AppAmaGooFaceSoft is no
> longer a bargaining chip. It might cause a tech salary “crash”, where
> salaries drop way closer to the skilled worker median.

This seems very unlikely. Tech is probably very far from being "solved"; and
the minute salaries stop being relatively high, that's when people will stop
joining bootcamps and getting CS degrees, instead going back to finance or
whatever the hot ticket is at the moment. This will likely cause a dampening
effect on tech salaries, cushioning any decline in the short term, and
creating a serious talent supply problem in the long term, which will just
push salaries even higher.

I think that the truth is, tech is in demand everywhere. Because what tech
really is, in many cases, is about improving your processes, automating work,
and increasing efficiencies in all sorts of businesses - and that isn't
something that has an endpoint. There are still many fields that have barely
begun to benefit from what tech has to offer.

~~~
nugget
I am always actively recruiting mid to senior level candidates out of FANGs. I
would say about half of these people are seriously poachable, given the right
opportunity. For the other half, their compensation is simply too high to pull
them out. If FANG salaries dropped by half, I estimate the number would
increase to 80-90%. If venture capital funding dried up such that FANG
salaries decreased AND Series A+ startup opportunities dried up, then I'd
predict a reversion to founder-heavy garage based startups. Because the one
thing that is not going away in the near term is the sheer number of unsolved
problems/opportunities in tech.

~~~
tudelo
Is this because of grant appreciation due to stock market trends or just raw
compensation?

~~~
c0restraint
Both (anecdotally, from my personal experiencE)

------
apalmer
It's not so much that the article is false as it is that its using a very
broad interpretation of terminology.

In essence all of'supply' and 'demand' would fall into this risk premium
bucket by this interpretation.

------
usaar333
This article effectively is saying that if the demand for developers falls
that salaries would fall. Which is obvious to anyone who has taken econ 101,
but I have no idea how this is anymore of a "risk premium" than anyone else
who works for a living.

> and the cut you’re taking from not working at AppAmaGooFaceSoft.

This pre-supposes that:

A) Apple, Amazon, Facebook, Microsoft are the highest paying companies (not
only not true for liquid cash, even less true if you factor in start-up equity
expectation)

B) Salaries aren't being set by all the other companies as well. [Generalists,
at least in the Bay Area, are in a competitive employment market, not an
oligopoly]

~~~
amitutk
The article is not saying that - if IBM hires 100,000 developers but
AppAmaGooBookSoft have a hiring freeze, then then you get a much smaller risk
premium. The point being that AppAmaGooBookSoft pay insane salaries so other
companies need to pay their employees somewhat well to minimize risk losing
their (best) employees to AppAmaGooBookSoft.

~~~
usaar333
Can you define what "risk premium" means here?

I can't tell if the argument here is that the market isn't competitive or
something else. It's not like FAANG pays high salaries because they are
generous.

------
jobead
Don't the salaries at AppAmaGooBookSoft (sorry, patio11's spelling is
canonical here) themselves include a risk premium that is incenting the people
there to stay instead of going to work at a small company with the opportunity
to topple one of them?

How do you model those risk premiums against each other? It seems like they
should both go infinity in order to keep anyone from ever leaving anywhere.

~~~
jmeyer2k
It's a market for risk. Risk premiums are worth what tech companies will pay
for them. If it's more expensive to find a replacement than pay a risk
premium, tech companies should and will pay the risk premium.

In the long run, the price of the risk premium = the cost of replacing the
employee.

------
jldugger
This feels like an overreach of the risk premium concept. At the very least,
it doesn't describe how AppAmaGooFaceSoft arrive at their compensation scheme.
You need to separate out uncertainty from the supply function (sell your time
to the highest bidder). If the risk is someone might come along with a better
offer, but the job market is too opaque to know for sure, there are systems we
can set up to make it more transparent. Or at least lock in the current rate
for a span of time with a contract.

I'm relatively certain that if you established a clearing house for tech jobs
the way the AEA does for economists, even if it removed all the uncertainty of
who the highest bidder for an employee was, wages would remain high or
possibly go higher. There's a lot of room for top tech firms to bid up wages
yet, and even the small bootstrapped companies value programmer time pretty
highly.

------
willdearden
The author misunderstands risk premium, which is the extra reward the market
offers in expected value to induce you to take a risky proposition over a
certainty equivalent.

I think programmers’ salaries are weighed down by risk aversion. It’s tough to
measure marginal impact, you don’t know want to be punished for being placed
on a less productive team, etc. So salary is some function of your expected
marginal productivity on an average team but scaled down by a risk premium. If
you don’t want to pay this risk premium, trading is an option.

------
lordnacho
Risk premium: you could have your money in government bonds, so to entice you
to put them in something riskier, you have to offer a better return. The
riskier, the more people have to think it can outperform. That's not to say
that this is what ends up being realised, otherwise it wouldn't be risk.

Not clear how this connects with this idea about tech salaries. Where's the
uncertain outcome? Person potentially jumps to FAANG? What's the certain
outcome in the analogy?

~~~
francisofascii
If I am reading this correctly, the certain outcome is when the smaller
company pays a salary equal to FAANG. The person has no incentive to jump. The
uncertainly is when the company pays less than a FAANG salary, pocketing the
extra salary not being paid, and taking the risk the person does not jump. The
lower the salary, the more risk the person jumps, but the more money the
company saves.

------
AceJohnny2
Speaking specifically about the Bay Area, I feel like salaries here are driven
significantly by the insane cost of living.

There's the feedback loop between the salary competition and the stupidly
constrained housing market.

~~~
Infinitesimus
Some people believe it's the opposite ( chicken and egg blah blah blah) that
because a lot of people got very rich in the tech boom, it 1. attracted more
people to the area and 2. gave them a lot more pricing power over the already
constrained housing... the restrictive housing policies just poured more fuel
on the fire.

I'm not close to the area so I'm happy to be corrected by those who saw things
unfold over the years

------
mnm1
AppAmaGooFaceSoft is only one part of the picture. The ability for engineers
to open their own companies, from one person businesses to unicorn startups is
the other part of the picture and I think even more important because, barring
some extreme changes to our business laws, it's not going away as long as such
companies are valuable. If salaries drop, I thin we would see a giant increase
in entrepreneurs. The more the drop, the higher the increase. There's no need
to build a unicorn to make good money. One or two people is all it takes,
often. Startups know this because they all were in the same position not too
long ago. What's to keep their employees from going out and forming their own
startup with the same idea, especially when non-competes can't be enforced?
Why wouldn't tech workers do so if their salaries dropped so significantly? Or
pursue other ideas? Or work easier, non-tech jobs?

------
devmunchies
AppAmaGooBookSoft ignores Netflix, which is important for salary calibration
since they are cash-only. And FAANG ignores MS.

We need an acronym for all of them. (Facebook Apple Google Microsoft Amazon
Netflix).

This also doesn't take into account the high salaries you can get in NYC in
fintech.

~~~
rifung
> AppAmaGooBookSoft ignores Netflix, which is important for salary calibration
> since they are cash-only. And FAANG ignores MS.

Why does it matter if it's cash only? The stock is equivalent to cash unless
you care that much about the fluctuation.

At Google we have Autosale so any time I get a stock grant it's automatically
sold and deposited into my bank account as cash.

At Microsoft I think they go even further and give you an amount of stock
based on the cash value at the time you receive it so you don't even have to
worry about price fluctuations. (At least that is my understanding)

I believe the reason FAANG ignores MS is that MS salaries are lower, but that
is only based on my personal experience.

~~~
Infinitesimus
FAANG was coined base on stock performance and MS wasn't a hot stock at the
time

It happened that because their employees are paid heavily in stock, the
acronym became synonymous to high paying jobs

------
tmaly
I think you also have to factor in location. You can’t pay someone 50k and
expect them to work in SF or NYC.

As companies adopt more remote work strategies, I believe there will be
downward pressure on salaries.

------
whatitdobooboo
This seems like a complicated way of explaining supply and demand?

------
mcv
This article is taking a questionable idea way too far.

The reason I get paid what I'm paid, is because the company hiring me expects
the work I do for them to be worth at least that much. If not, they would not
hire me.

So the money I'm paid is not "risk premium", it's simply getting paid what
you're worth. It could actually still be less than what my work is worth to
them, but I don't have a good way of telling, and it's probably still more
than what I'd be able to earn making my own product.

Though if there's one profession where it's easy to make your own product with
very little risk or investment, it's software engineering, and that's probably
the reason why we get paid much closer to what we're worth than many other
professions; because to us, leaving and starting out own business is always an
option when employers don't want to be reasonable about what they pay us.

Also, there's enormous demand for what we do, so that increases our bargaining
power, and therefore our salaries.

So to what extent is our salary risk premium? I suppose an employer could pay
us much less than what we think we're worth, and if we have nothing better at
the moment, we might take it and leave the moment we find something better. In
that case, it would be better for the employer to pay us more to discourage us
from leaving.

But is that risk premium? If it is, then practically any salary, and perhaps
any cost, can be considered risk premium. I don't see this as a very useful
way of looking at things.

And Google and Facebook have little to do with my salary; they barely have any
jobs in my field in my country, and I don't want to emigrate. Sure, I could
make more if I worked in Silicon Valley, but I don't see that being worth it
for me.

------
steve1977
Some strange assumptions here. For example, the article kind of implicitly
assumes that AppAmaGooFaceSoft pays best. I don't think that's the case. If
anything, people work for AppAmaGooFaceSoft because of prestige. But this
would then contradict the whole article in a way.

------
sbarre
I also think that generally speaking it's a seller's market right now for tech
skills, and has been for years.

At least where I live (Toronto), there are more jobs than (qualified)
candidates. At my last job (a very large digital team inside one of the
largest corporations in the country), we were hiring up to 20 people per
month, and usually interviewing 100+ just to get those 20 people. And still
had lots of job openings.

Most candidates would tell us that they're talking to 4-5 other companies, so
we often didn't get people even if we made them an offer.

From speaking to colleagues elsewhere in the city and country, most (non-
AppAmaGooFaceSoft + Shopify for Canada) companies are in the same boat.

~~~
gen220
Anecdata; but I know the hiring numbers of a tech-forward company with a
couple hundred engineers in NYC: 1.2 in 100 applications results in a hire.
They have a 4-ish step hiring process where between 1/2 and 3/4 are dropped
each step.

It's an environment where both sides of the market are currently empowered to
be highly selective.

~~~
war1025
> They have a 4-ish step hiring process where between 1/2 and 3/4 are dropped
> each step.

Isn't part of this just the standard signal / noise resulting from the fact
that most people who are capable of doing the job are currently employed, so a
larger than normal number of applicants will be sub-standard, since they are
the ones who can't get a job?

~~~
sbarre
There's probably truth on both sides here..

We (my previous employer) were quite selective in our screening, so there were
plenty of people applying that we turned away.

But I would say the majority of people we interviewed were employed but
looking for something better or different.

------
SergeAx
I am sorry, but this article is just an air (fiber?) tremor. The matter is
much easier, it is pure free market process.

There are companies who needs software to increase their profits and/or gross
margins. There are people who can engineer software.

There are different levels of software complexity (think between Excel
spreadsheet's formulae and operating system). There are different skill levels
of software engineering.

There are different gross margins obtainable via software of different
complexity. There is everlasting competetion between companies for market
shares.

Everything else is demand and supply curve from Economy 101.

------
carapace
Of course, in practice, AppAmaGooFaceSoft (and "dozens more") will cap wages
by simple collusion.

[https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_L...](https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_Litigation)

[https://pando.com/2014/03/22/revealed-apple-and-googles-
wage...](https://pando.com/2014/03/22/revealed-apple-and-googles-wage-fixing-
cartel-involved-dozens-more-companies-over-one-million-employees/)

------
scarejunba
This just sounds like a limited form of Baumol's Cost Disease.

~~~
usaar333
That's actually a much better analogy. Companies at high scale can achieve
higher productivity per developer every year.

Not at high scale? (say a one-off consulting project). Sucks for you -- labor
market is surging from the high scale company's productivity improvements. Be
prepared for your labor costs to go up much faster than inflation.

------
freeone3000
Then what drives the high salaries at AppAmaGooFaceSoft?

~~~
sbarre
The fact that those companies basically print money?

And the internal competition between themselves (that wasn't always there:
[https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_L...](https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_Litigation) )

~~~
freeone3000
Why does a corporation making more money result in its employees earning more?
Out of the goodness of the CEO's heart? I don't believe in this trickling
down. They obviously need to pay more in order to attract the top talent, but
why?

~~~
svachalek
An employee costs you X per year, so you need to make a multiple of X to
justify the hire. The higher that multiple is, the easier it is to make that
decision. When there are lots of companies competing to hire tech workers for
easy money, salaries rise.

------
zuhayeer
For reference on the AppAmaGooFaceSoft pay market right now:
[http://levels.fyi](http://levels.fyi)

------
aj7
Taking a slightly lower salary can be a risk premium against being fired. The
goal is to maximize the expectation value of all earnings, not instantaneous
salary.

------
wegs
I think this can be best summarized as "a rising tide raises all boats."

Unions have long fought to keep demand up for specific industries under this
exact logic.

------
xyzelement
Supply and demand of labor would be a more accurate and concise way to
describe this.

You are worth more when there’s more demand for your (and people like you)
labor.

------
fullshark
The core idea here doesn't seem unique to tech.

------
thulecitizen
I am curious why nobody has mentioned where all this money comes from in the
first place, namely: Intellectual Property.

Corporate programmers get access to monopolized technologies, improve them for
the owners of the 'intellectual property' they create, so that the corporation
they work for can (continue to) extract rents.

Professor G. Standing says this about 'rentiers':

“[Rentier capitalists] assert a belief in ‘free markets’ and want us to
believe that economic policies are extending them. That is untrue. Today we
have the most unfree market system ever created….

How can politicians look into TV cameras and say we have a free market system
when patents guarantee monopoly incomes for twenty years, preventing anyone
from competing? How can they claim there are free markets when copyright rules
give a guaranteed income for seventy years after a person’s death? How can
they claim free markets exist when one person or company is given a subsidy
and not others, or when they sell off the commons that belong to all of us, at
a discount, to a favoured individual or company, or when Uber, TaskRabbit and
their ilk act as unregulated labour brokers, profiting from the labour of
others?"

"…today, a tiny minority of people and corporate interests across the world
are accumulating vast wealth and power from rental income, not only from
housing and land but from a range of other assets, natural and created.
‘Rentiers’ of all kinds are in unparalleled ascendancy and the neo-liberal
state is only too keen to oblige their greed.

Rentiers derive income from ownership, possession or control of assets that
are scarce or artificially made scarce. Most familiar is rental income from
land, property, mineral exploitation or financial investments, but other
sources have grown too. They include the income lenders gain from debt
interest; income from ownership of ‘intellectual property’ (such as patents,
copyright, brands and trademarks); capital gains on investments; ‘above
normal’ company profits (when a firm has a dominant market position that
allows it to charge high prices or dictate terms); income from government
subsidies; and income of financial and other intermediaries derived from
third-party transactions."

Source: [https://www.resilience.org/stories/2017-08-03/book-day-
corru...](https://www.resilience.org/stories/2017-08-03/book-day-corruption-
capitalism-guy-standing/)

------
tempsy
I don't even know given the cost of living in the Bay Area if $300K is even
really "high" anymore.

If you max out 401k and IRA this is $275k, which is $168K take home or $14k a
month.

1-bedroom in SF + Utilities: $4000

Car: $500

Parking: $200

Groceries: $500

Healthcare (copays/premium contribution): $200

Entertainment (incl drinks, streaming services, going out to eat): $500

Phone: $100

Misc. transit: $200

Debt payments (Student loans): $400

Left over: $7400

If you want a child or buy a home...

A 2-bedroom condo will take $1.5M or $300K for a down payment. Then you have
to add insurance + HOA. A 1.2M mortgage + insurance + HOA will be close to
$8K/month.

Full-time childcare costs $2K/month (+ need to save for college, then all the
costs with raising a child).

~~~
usaar333
Spending $14k/month is luxury living even in the Bay Area.

1\. Your housing numbers are "luxury" prices. (those are generally numbers you
see in say SOMA).

2\. Having a car in SF in such premium neighborhoods is a further luxury item.

3\. Homes are also way overpriced here compared to rent, but that's another
story.

Your childcare numbers are actually more on the average side, but again, $300k
for a single earner (with stay at home spouse) is obviously way better than
$300k combined -- meaning you either:

A) shouldn't count childcare.

B) it's another luxury item.

Now don't get me wrong - if you are earning $300k a year as a one-earner
family, you'll probability still be feeling money woes, but that's more of a
testament to the standard of living in your social group being so high (who
sends their kids to public schools?? weird!!) than any absolute metric.

~~~
tempsy
I think you have to factor in tech jobs are not as stable as people think.
Performance review cycles regularly involve getting let go for a non-
insignificant number of people. And people do not stay at companies for very
long relatively speaking, either voluntarily or not.

Also hard to imagine that the bull run will last forever. A recession will hit
the tech industry hard.

~~~
pb7
Top tech companies are very stable in terms of employment. It is notoriously
hard to get fired at the likes of Google and even if you draw the short straw,
you often have 6-12 months of notice. People generally leave because they get
job offers for more money or a combination of same money + shorter commute or
more interesting work or change of scenery. Finally, the last recession was a
doozy and still hit tech no harder than any other industry. Most of the same
tech giants you’re talking about didn’t even have layoffs. I would call that
as stable as it comes.

~~~
tempsy
Please read up on the performance review system at most tech companies because
what you're saying simply isn't true.

~~~
pb7
I am quite familiar with the performance review process at top tech companies
given that I work at one. The difficulty in getting fired (especially without
advanced notice) is often laughed about. The only thing harder than getting
into these companies is getting fired from them.

~~~
tempsy
Maybe at Google. It just isn't true for (at very least) Netflix, Uber,
Microsoft, and Amazon.

~~~
pb7
Netflix, Amazon, and Uber, no, but Microsoft is a hard yes. It was the first
tech giant to popularize the whole "rest and vest" cliche and still does.
Facebook and Apple vary by org but it's still quite possible if that's what
interests you. Then drop down a tier and it's very easy -- the likes of
Oracle, IBM, eBay, PayPal, Adobe, etc. push very few out because barely anyone
wants to come in.

~~~
tempsy
So I named 4 well known tech companies, and you admitted 3 of them do
regularly layoff workers during performance review cycles, and yet continue to
argue that it isn't true that companies lay off employees on a regular
basis...?

Ok...

~~~
pb7
I admitted that it's not _laughably hard_ to get fired but it's still pretty
hard if you show any semblance of effort. Naming three (of the most cut
throat) exceptions out of thousands of companies is not an argument.

~~~
tempsy
I named 2 out of the 5 companies that are a part of FAANG. The other is
considered a big tech employer now.

The top of market salaries come from these large, competitive companies. It is
more unusual to be making that much and "resting and vesting" than not.

