As an accountant, I feel like employees are severely underpaid in highly-skilled markets (like tech, not accounting), and I think that companies don't actually capture the true cost of a single full time employee.
Most see a salary, benefits, fringe costs (like hiring HR and finance teams), lunches, etc. Some of the better firms add in the cost of hiring employees with intangibles, like communication, poise, and professionalism, but the truly great see the largest potential cost - that they do better work at a competitor.
If you're paying an engineer $100k to add 150k worth of value to your product, the true value of their work is $300k: $150k worth of value to you, and $150k worth of value that isn't added to your next closest competitor.
It's the same reason football teams say "defense wins championships" - because Defense is the only position where you can simultaneously score points and stop your opponent from scoring. Offenses can only score.
Now, that employee shouldn't be paid $300k because that's the true value for the organization, rather, they should be paid as close to the marginal benefit they directly apply to the organization - in this case, $150k. Doing so may be a breakeven point from a cash perspective, but a billion dollar company that breaks even is worth more than a lemonade stand making $10 profit.
From an accounting perspective, this can be observed as employee expenses (temporary equity accounts) providing value to products (permanent asset). When the employee is terminated, the assets still remain, so for anyone with any equity stake in the firm, it is beneficial to pay as much as possible up to the point that the company a) doesn't run out of runway, b) retains talent to further grow the assets and c) doesn't grow competitor assets.
The CFO that cut soda costs by $10k also boosted the equity of all the competitors that hired the disgruntled employees - and most likely by a value greater than $10k, and multiplied by each employee that left.
Just my $.02
Edit: Cut soda costs by $10k total, not per employee
If you're paying an engineer $100k to add 150k worth of value to your product, the true value of their work is $300k: $150k worth of value to you, and $150k worth of value that isn't added to your next closest competitor.
That model seems to assume:
- every employee who leaves will go to close competitors
- their work for that close competitor will be perfectly zero-sum to their work for your company
- the next best replacement employee your competitor would otherwise hire would be worth 0 to them
It does assume these things - but they're relatively reasonable. If your next closest competitor is doing worse than you, then your best employees, on average, must be better than their average employee. If an employee leaves your company for your competitor, they're adding value Day 1, whereas you have to go through the process of hiring a replacement, and hoping that they're just as good.
It also assumes that you don't pay your employees well enough to retire immediately after leaving ;)
That second one? Work being perfectly zero-sum with your closest competitor? Not at all reasonable.
Some of that extra business will be taken from other companies. In fact, unless it's a duopoly or you're by far the largest player in the market, probably most of that extra value will be taken from other companies.
> If you're paying an engineer $100k to add 150k worth of value to your product, the true value of their work is $300k
If you pay engineers $300K for every $150K in value they add to your product, your cost will exceed value and will accelerate as you add more engineers. It's therefore eminently clear that there is no meaningful sense in which the true value of an engineer's work adding $150K to your product value is $300K. (It's $150K less the necessary support costs that allowing them to work imposes on the company.)
The true value of the employee to an organization in a non-monopoly industry is 300k, in this example, because of the opportunity cost of the employee (assuming they could provide the same value at other firms).
The true value of the employee ==/== the total compensation of the employee. As I said above, the total compensation would be as close to $150k as possible - because at $149,999.99 the firm still makes a profit (of $.01) and gets product features shipped.
That only makes sense and in the case where added product quality in the market doesn't expand the total market, it cannibalizes, dollar-for-dollar, sales that would have been made elsewhere. This also means all the marginal value in your industry is actually being captured by your customers (this might make sense if you have a competitive market on your side, but are selling into a monopsony.)
If you find yourself in that unusual situation, your concern probably isn't with paying your engineers properly, it's with reorienting your business so it's not locked in that kind of market.
I see what you're saying, but if everybody is getting paid at the breakeven, or close to breakeven point, the company is going to be starved of capital it needs to grow, take bets, weather a bad sales cycle, etc. Also, how can a company give bonuses or raises to employees when all employees are already being paid what the value they are generating for the company is? You can play with how short of the breakeven point (or marginal benefit as you call it) the company pays at, but the closer you are, the less breathing room there is for the company.
Secondly, the salary of an employee isn't the entire cost to the employer. I've seen some different ranges, but a random Boston Business Journal article [0] cited the total cost as 2.7x base salary. A CNN Money article cites 1.18x to 1.26x [1]. It's obviously really different on a case-by-case basis, but whatever that multiplier is has to be taken into account.
Lastly, for many companies, engineers are worth far more than 150% of their salary as value to the company, on average [2]. Apple makes 1.87 million per employee, Microsoft at 732k, IBM at 244k. These are obviously huge tech giants, but they are employing quite a lot of the highly skilled employees that you think are being underpaid. I'm not interpreting your comment to mean that your idea should be adopted for everybody in every situation, but certainly in a lot of (most?) places it can't work. Many tech workers are not paid what their true value to their organizations are, but I'm not sure that's a problem in of itself.
> Also, how can a company give bonuses or raises to employees when all employees are already being paid what the value they are generating for the company is?
is a terrible argument. In the event that my boss determines that I deserve a bonus, I consider that an adjustment for mis-estimating my value when determining my original salary. If you pay me enough that you can't afford to pay out a bonus, then I don't need a bonus.
If you plan to pay out bonuses, given that the practical value of future money is less than current money, I prefer to simply have that bonus money added to my base salary from the beginning.
I realize that for many people there is a psychological factor involved; getting a bonus feels good, in a way that getting the same amount of money spread out throughout the year does not, and there is some value in that. But the ability to choose one payment option over the other should be open to a potential employee during negotiations. You should be able to offer the option of a higher salary in exchange for no possibility of bonuses.
That's a fair criticism. You're right that with this system of paying somebody as close to their value as possible, bonuses and raises wouldn't make sense.
It did make me realize though, that there is a risk of having a downraise, if the value of what you produced in the past cycle is less than the one before that. Even with a hypothetical way to accurately estimate the value (unless we're averaging), having a downraise or even the risk of it, is a big hit against this system because of the stress it would create for some, imo. Additionally, for some people, there may not enough incentive to continue working in the current cycle, if they feel they have already delivered as much value as they feel they need. Some people would be content delivering 100k of value for instance, wherever that is in the cycle, while some would be trying to reach new heights.
Great offenses in football stop the other team from scoring all the time by monopolizing the football for 80% of the game. It's not just direct actions that are important it's indirect.
I thought it would be fun to do the math on this one. A 12-pack of coca cola cans is $5.00 USD. So 10K would buy 24K cans of coca cola. If that was their yearly soda budget, it would be 66 cans per day. So yeah, obviously an absurd amount for a single person to be consuming.
Small perks like free lunches, gym membership or a massage every month are huge in making employees happy.
We're a seed funded company and provide free lunches to our employees. We also reimburse up to 100$ a month for fitness/gym memberships. Some of my friends working in large organizations don't get these perks, and point out that they're wasteful of a company that is cash flow negative and trying to conserve capital.
What most people with such mindset don't realize is how valuable inspired people can be. For employees to be inspired, they must do work they find meaningful and they must be appreciated and challenged. But they also must realize the company genuinely cares about them. Then they want to give back to the company; they want to exceed expectations because they love how the company cares about them.
Now you need to show care to employees on an everyday basis, but one amazing way to show it is with perks like these. 100$ a month for gym or 200$ a month for lunch per employee is not outrageous if you compare that with how much you pay them every month. It's almost miniscule. Also, in most startups at least, they're getting paid below market rate in exchange for equity etc. Not having to worry about lunch or gym everyday makes a huge difference psychologically.
The one situation where you can justify cutting perks is when the company is going through a genuine crisis, cutting the perk is critical to get through, and you let everyone know this is temporary and it's just something we all must do to get through this crisis. Otherwise, instead of trying to cut soda out, the management needs to focus on growing revenue and profits and ask themselves why they're not succeeding there as much as they'd like to. Hiding behind a soda cut isn't going to fix the issue.
PS: I used to worked at Salesforce where we got several days a year off just to go volunteer time at non-profits. You'd be amazed at how much employees love the company for allowing them to do things non-work related that they're passionate about just a few days a year while getting paid for it. It says that the company has a warm heart. The impact shows up in the company's relentless growth year after year. Same with companies like Costco. Showing care for employees has an outsized impact on the bottomline.
Just a brief +1 to this: I'm a fit guy who's traditionally been a fairly regular blood donor. My newest (and still current) firm has its offices a couple blocks from a permanent blood donation center, and since it's so easy to donate I started to do platelet donations, primarily since the refractory interval is much shorter than other donation types.
However, as some may know, apheresis takes considerably longer than other donation procedures (~ 2h45m), and at the time I had a PHB manager who wouldn't allow me the time to donate as often as I was able (and willing).
This really soured me on his leadership. An attitude such as you cite at Salesforce would have fostered in me a much stronger sense of symbiosis between me and the company.
So instead of "getting more work out" of me (his intent), instead he got an irritated employee who had little to no inclination to go above or beyond the minimum (wrt what he asked or expected, not in general).
I think my experience and attitude is a classic example of strict bean counting and lack of soft skills backfiring on companies (or managers) with similar methods.
I tend to agree with this perspective but I don't think anyone has managed to actually create an experiment to study it. (perhaps if two startups in the same space had diametrically opposed benefits you could use their market share or productivity as a comparison metric).
There is also something tribal/instinctual about sharing food. Buying lunch two or three times a week for the team will bond them better paying them cash. And a well bonded team is a higher performance team. That you can measure with your sprint planning. The downside is that it is disproportionately impactful when you take food away. When Crawford Beverage (HR VP at Sun) discontinued the company beer bash (and it was just popcorn, chips, maybe some vegetables with ranch dressing and beer, not even a lot of food) it permanently scarred morale.
They don't though, in most cases. All that stuff is just window dressing. I haven't thought about it a lot, but genuinely caring might mean not firing someone going through a rough patch, when their productivity is pretty bad.
I'd say that when you've worked at a company > 6 months, you know if your manager cares about you. You know if the management cares about you. Doesn't take much to figure that out.
I think there are 1-1 and public ways of showing care. When an employee has a performance issue and is going through something rough, you have a private conversation, nobody else needs to know (unless they're impacted/frustrated and you let them know some of it to make them cut some slack) and the employee is taken care of.
Perks are a public way of taking a stand and saying I care about people and will provide these perks and won't take them away except in the direst of situations. Providing perks won't make people love you, but it shows you care. They're nice to get and show thoughtfulness. Especially if you're not obnoxious otherwise.
Thinking out loud: maybe "giving without expecting anything in return" ? Perks and compensation are things you mostly expect to get something back from.
Something genuinely nice/caring at the place I work now was the Wednesday before Thanksgiving where they just told everyone to go home after lunch and enjoy the long weekend.
> The most talented and senior engineers looked up from their desks and noticed the company was no longer the one they loved.
This is well-worded. The problem for these execs wasn't that the company was no longer a good place for engineers. The problem was that the engineers noticed.
Don't be the engineer who doesn't notice their job sucks until they start charging for soda. By that point you've been working for a terrible company for a long time.
The free soda n junk in startups is bullshit. I'd rather get paid a little more and spend that on what I choose (something healthy).
Who would be enticed by that?
What is enticing to me is the freedom to work how/where/when I want.
You do get the option of consuming it, which is worth at least a little if you ever want the convenience. Even if you never do, it's a good perk to have because it's so visible if it gets taken away.
Agreed. TANSTAAFL, and I guess it is the old left (as in everyone equal) vs right (free choice) debate.
We get free bread for lunch. Cool, but I don't wanna eat bread.
Coffee is free. Cool, but it is bad quality, my el cheapo espresso machine at home is even better. Plus I'll experience a massive down in the evening. Oh hey, not the employer's problem.
I've never seen free soda anywhere, but the thing is: it is just a lot of sugar, with too little water. I won't drink that if I get paid for it.
At least water is free, and that's important in the summer. I'm free to go grab a cup, and the walk is healthy, too.
Then there's these parties 'for team spirit', with all kind of fried food. Cool. Guess who pays for that?
Screw all this. Like you said; "I'd rather get paid a little bit more."
I agree with you - but there are two advantages to giving perks like food:
No transaction costs. Not just the actual monetary cost of the transaction, but no need to employ people to man registers, no need to wait in line to pay. And more subtly, no need to argue with yourself about whether it's worth it to buy the item you are consuming.
Secondly, these perks are bought in bulk and provided without having to pay income tax on them. So it's just cheaper than paying people more and having them buy the goods.
That being said, I do wish there were more healthy options by default.
An additional point as to why I dont like this..
I'm busting my ass in the code mines making this amazing software thats making us all money. Then 'management' waste it on frivolities, like free junk food, booze, time wasting exercises, stuff that they like. It also means they may be unthinkingly following the silicon valley style 'startup' stereotype, which is actually almost depressingly ironic. Anyway, its not a big deal, but that stuff is a warning sign for me.
"It never ceases to amaze me how many startups make the mistake of killing off the free drinks."
(One of the comments on the page.)
But wait a minute. Killing off the free drinks is just the signpost. The change is primarily in the size and the culture of the company itself. Charging for sodas might be the first, but it isn't the biggest change that the company is going to, and going to have to, make as it grows.
Does anyone really believe that IBM, Amazon, Facebook, or Google would still be their happy fun startup selves if they still gave away free sodas?
So did mine. And at one point, ice cream in the fridge.
Of course, it was what became the "Solutions Experience Lab", so we had a smart kitchen set up with RFID readers for medicine bottles, and an oven that would keep things cold and remote operation capabilities. And the fridge was wired up to report electricity usage: when they first installed it, they found wildly varying swings in temperature and power use. Turns out, you need to put something in it as thermal mass. Sodas are good, but ice cream doesn't work because people eat it too fast. That got replaced with plain ice.
Yeah, Google didn't invent free soda. We had free soda at the startup I founded in 1994. I interviewed at Davinci Email in 1991 & they had free soda and a fridge stocked with free food.
Microsoft has free soda and the food is fairly cheap.
Eh? Could have changed since I was last there eleven years ago, but in the last four or five years of my tenure I rarely ate in the cafeterias because for less money I could get more and better food within a five minute walk. And I got to go for a walk at lunch. (So I guess I'm talking on the order of fifteen years ago. Never mind the old man in the corner mumbling to himself about how it was better, er I mean worse, back then.)
Wait. I know all about having dunderheads hired above me, having gone through the dot com bubble and crash.
But are you implying that no VP should ever be hired over the early engineers? I can imagine numerous situations where doing just that would provide value to the engineers and the company. And an experienced VP, even if expensive, can be a bargain if they've "done this before".
I still don't understand why companies would willingly serve free drinks (and snacks) that they know will only deteriorate the health of their employees. Free drinks, sure, but 290-calorie cans of sugar, and bags of fat? Say what you will about adults having free will to make bad choices, but your company doesn't give away free cigarettes.
Right next to those are generally the free diet sodas, the free seltzers, and the free teas and juices.
Next to the chips and candy are the protein bars, trail mix, nuts, and fresh fruit.
Over in the cafeteria, next to the free pizza is the free salad bar.
With any luck you've got a range of employees. Some are concerned about their weight; some are concerned about getting enough vitamins; some really really want a boost of sugar and caffeine. It's possible to cater to all of them.
You're missing the point; soda is a creature comfort.
If an employer can cut soda, they can cut coffee, and coffee brewing equipment.
They can cut refrigerators, microwaves, and dishwashers. Break rooms can be closed and replaced with cubicle space. Washrooms can be cleaned every other day.
And on and on and on.
In your argument, cutting any creature comfort is a slippery slope that leads not only to removal of all creature comforts, but also the removal of rest areas and communal food and drink preparation areas, and even unsanitary facilities. (This sounds like a joke...)
First, almost all corporations in America have break rooms and do not usually give away anything except possibly tea and coffee. Removing the free tea and coffee does not remove the break room. Break rooms have multiple uses.
Second, there are some laws and some basic industry standard practices that apply to the sanitary conditions of washrooms. Removal of creature comforts or breakrooms do not change them.
Third, Cigarettes are also a creature comfort. Why not give away cigarettes? Because they're bad for you, and expensive. Sodas are also bad for you, and expensive. And might I add, neither are necessary for you to do your job. Removing them would not have an effect on removing the break room or equipment, the sanitary conditions of washrooms, or anything else, because quite frankly they are not only unnecessary but they are (over time) harmful to the employee's health and contribute to diseases that will only prevent the employee from doing their job and increasing medical coverage costs.
So I doubt companies give away free soda and chips to prevent the slippery slope of unsanitary bathrooms.
In my company whenever they pay for lunch it's always bad food. Bad pizza, greasy sandwiches, junk food. I don't understand why can't order some decent food.
It's probably a default setting. Go find the person who ordered the food, and give them menus from four or five decent local restaurants.
In my experience (Boston area), people will happily eat Middle Eastern, Chinese, good Italian, northern and southern Indian... and, in general, will be happier with something different from the last time.
What? They quit the company because they no longer got free sodas? I'd rather have an extra 300$ of salary per year, than free cans of Sugar all year. And, if the best developers have so much bargaining power as to leave, just because of sodas, why aren't they leaving toxic work places like Amazon in droves?
Other places are cutting cost in far more profound ways: laptops and computer equipment, etc.
> The engineers focused on building product never noticed when the company had grown into something different than what they first joined. The sodas were just the wake-up call.
As for why engineers aren't leaving Amazon in droves, Amazon actually has pretty high turnover. The average employment term for engineers is 18 months. So engineers are leaving, but there are more engineers replacing them. Newly graduated engineers join big name tech companies like Amazon, Google, and Facebook to boost their resumes before going on to do other things.
The point here is that it wasn't the sodas that made them leave. The sodas were a tangible, visible thing that made them evaluate everything else, which also wasn't good.
I think it's more of anticipation for the future. If a company cuts overhead for something big, say, a corporate holiday party from $100k to $80k, some may be frustrated, but it's probably because they recognize the waste in hosting at the Ritz instead of the Hilton. It doens't necessarily mean salaries, benefits, or other, smaller, things will be cut, but it's sending a message that the firm cares about fiscally sustainable operations.
If a company cuts costs of the little things, all of a sudden everything is put on the table. Stock options, salary, benefits, perks, headcount. It sends the message that the company cares about operating today more efficiently than it cares about growing (because no company would stop investing in employees if it could still grow, because good employees make good products).
Companies cut small costs because they believe that their product/market fit has reached the final destination and the only way to grow profits is by cutting. The best firms (and by extension, employees) realize that the best way to grow is always up.
I think that's probably over-estimating the case value by a fair amount, because the company should be buying in bulk. They also would take the expense off their taxes, whereas if you buy soda, both of you pay taxes.
This is a good point. But, there's also some inefficiencies that creep in because like a centrally planned ecomonomy, the company can not adequately predict the demand for each free snack, food and drink, leading to excess waste (at least for perishable items).
personally, I would rather have teas and vitamin waters, rather than cans of sugar.
> It’s about the company’s most valuable asset – its employees.
There are often two ways to look at that statement.
Employees aren't fungible and how that cuts both ways.
The longer someone works in an established company the more tribal knowledge they accumulate to the extent that an equally talented fresh face cannot replace.
And the other is that some employees have already done their part & are now not easily moved into a different role (Peter principle or otherwise).
That fine line is somewhat scary to look at, particularly when you work in a boom-bust environment like a video game company or when the company does a tough pivot.
The thing that irks me about ALL of the places I ever worked at is that they prefer to shower you with benefits like [small partial] free dental, gym memberships, food stamps, and what not.
It seems nobody ever stops to think "Hey, our employees are ADULTS, right? How about we just give them all these money as a flat paycheck increase and let them decide what to do with them?".
I switched desires many times in my life. Sometimes I've been going regularly to dentists, other periods I've been going to the gym, and then I have been eating twice a day for months -- and half a year later I wake up to the fact that it's much healthier to eat 5-6 times a day (but food stamps don't cover for more than 1 meal), and then a year later I figure I simply want to watch most of the modern sci-fi TV shows in several huge binge sessions. Examples abound from mine and many others' experience.
These organizational policies are pandering to the common lowest denominator. THIS IS ABSOLUTELY FINE. The part that pissed me off in many of my office jobs in the past is that the managers fail to recognize the people who don't want their free things and would prefer another format of loyalty bonuses.
The biggest failure of the management in organizations like those in the OP is the fact that these people are under the illusion that they can shoehorn their people into strict processes during one big effort session, and then never do management ever again.
Most see a salary, benefits, fringe costs (like hiring HR and finance teams), lunches, etc. Some of the better firms add in the cost of hiring employees with intangibles, like communication, poise, and professionalism, but the truly great see the largest potential cost - that they do better work at a competitor.
If you're paying an engineer $100k to add 150k worth of value to your product, the true value of their work is $300k: $150k worth of value to you, and $150k worth of value that isn't added to your next closest competitor.
It's the same reason football teams say "defense wins championships" - because Defense is the only position where you can simultaneously score points and stop your opponent from scoring. Offenses can only score.
Now, that employee shouldn't be paid $300k because that's the true value for the organization, rather, they should be paid as close to the marginal benefit they directly apply to the organization - in this case, $150k. Doing so may be a breakeven point from a cash perspective, but a billion dollar company that breaks even is worth more than a lemonade stand making $10 profit.
From an accounting perspective, this can be observed as employee expenses (temporary equity accounts) providing value to products (permanent asset). When the employee is terminated, the assets still remain, so for anyone with any equity stake in the firm, it is beneficial to pay as much as possible up to the point that the company a) doesn't run out of runway, b) retains talent to further grow the assets and c) doesn't grow competitor assets.
The CFO that cut soda costs by $10k also boosted the equity of all the competitors that hired the disgruntled employees - and most likely by a value greater than $10k, and multiplied by each employee that left.
Just my $.02
Edit: Cut soda costs by $10k total, not per employee