I’ve been working in the United States for over four years now. I worked for Google in Silicon Valley for over a year and a half, and then I moved to New York to join Squarespace, a growing startup in New York. In addition, I have a clear understanding of the compensation structure design of American technology companies through communication with colleagues and friends over lunch in recent years. Most of the Chinese students who have just finished their undergraduate or graduate studies in the United States know little about this aspect, resulting in a dumb loss in offer negotiation. I hope this article can play a popular science role, help readers better evaluate offer, less detours.

The first formula that needs to be clarified is Offer = Compensation + Benefits + Growth. You can’t just focus on the money. Benefits include company meals, various insurance policies, vacation policies, etc. Growth refers to your career prospects in the position and the Growth potential of the company as a whole. It can be viewed as a discount of future value. But this article will only focus on the Compensation.

The Compensation for each company is based on the local labor market, and there is a big difference between what an engineer would get if he interviewed for a coding position at Google in Pittsburgh and what he would get if he interviewed for a position at Google in San Francisco. Because the demand and competition for IT talent in the San Francisco area is significantly greater than that in Pittsburgh, employers have to pay a higher price to acquire talent. And the tax situation is different in every state in the United States, so if you’re looking for a job in Seattle or Austin, because you don’t have to pay 10 percent state taxes like people in California, employers will take that into account when they set the compensation. Many companies buy data from third-party consultants to position their hiring strategies. For example, if a company positions itself at 80% percentile in the market (meaning that 80% of the companies in the market are charging less than percentile for the same position) and finds that everyone else is going up and it is down to 70% Percentile, it will adjust its price and budget accordingly based on the analysis report. The higher a company’s percentile, the more expensive it is to hire, the more likely it is to hire better people.

The structure of Compensation is divided into three parts: basic salary, year-end bonus and stock. Shares are divided into several forms according to the company’s stage of development. I will introduce their functions, forms and matters needing attention one by one.

Base Salary

This is the most important number in the Compensation, and it also affects how the annual bonus is calculated later on. Base salary is usually paid weekly, bi-weekly or monthly based on the company’s cash flow and business situation, and will help you pay taxes in advance. There should be a reasonable base salary range for each position in a company, and if designed properly, there should be some overlap between positions at adjacent levels.

Take X Company as an example, its SWE basic salary distribution is as follows:

  • Junior SWE: 90K ~ 130K

  • Senior SWE: 120K ~ 160K

  • Staff SWE: 150K ~ 190K

An important purpose of the interview is to determine a candidate’s reasonable level in the company, and then fine-tune the Offer based on the range of the target level and the candidate’s comprehensive interview evaluation, work experience, length of service, etc.

Readers may wonder why a Senior’s basic salary should be lower than a Junior’s! There are several cases:

  1. The candidate performed well in the interview, and other hard indicators reached the standard. However, her previous work experience failed to demonstrate the requirements of X Company on her Senior SWE, such as the experience and ability to lead the project team. X Company has great expectations for her and also believes that if she joins X, she will soon show her ability. We hope to adjust her level then. Therefore, the Offer card level but loose the basic salary, hoping to lure the candidate with a big package to board.

  2. The candidate’s interview performance is in line with the Senior bar of X company, but her title in her last job is not Senior, and the company is much smaller than X Company. It is estimated that the average basic salary of X company is lower than that of X company, so she applied for Offer to Title Bump, but the basic salary is deducted. As for the candidate, both the title and salary have been raised, of course, very happy. For X Company, it also saves the cost of recruitment reasonably by recruiting the right people.

As a side note, many companies offer a match benefit for a 401 (k) 401 (k). If you contribute a little, the company will give you, say, 5%. The 5% here tends to be based on 5% of your base salary, so the higher your base salary, the more money you’ll get from your company’s match in your 401K. Because money in a 401K is not taxed until it is withdrawn, it theoretically yields a higher long-term compound rate of return than investing it with after-tax cash.

Annual Bonus

Year-end bonus as the name implies is a one-time bonus paid at the end of each year as a reward for the employee’s work in the past year. Due to holiday traditions and the tax system in the U.S., the annual bonus is generally paid between January and March of the following year, so that the income is not taxable as personal income for the current year. Not every company has a year-end bonus built into the compensation structure. And it tends to be tied to an employee’s base salary and performance. For example, company X stipulates that the annual bonus of an SWE with medium performance evaluation is 10% of the basic salary, while that of an SWE with excellent performance is 15% of the basic salary. Big Chinese companies tend to allocate the total bonus pool based on last year’s earnings contribution of that business unit, and then distribute it to employees below that division based on employee performance, a practice that seems to be unheard of in the United States.

The period of annual bonus is also a period of high turnover of employees in the company, the industry is said to be gold, silver and silver. It’s worth noting that if your next employer doesn’t match your current employer’s 401 (k) match ratio — say, 10 percent at your new employer versus 50 percent at your current employer — adjust your 401 (K) contribution one month before the bonus. Contributing as much of your year-end bonus as possible to your current company’s 401K can add thousands of dollars to your personal net worth.

Stock/Restricted Stock (RSU)

Stock is an indispensable part of the Compensation of American technology companies. As the saying goes, “To be rich, you have to buy shares” 💵. A typical public or pre-IPO company will issue stock/restricted stock, while early-stage or growth startups will issue options (more on that below). Take COMPANY X as an example, its Offer to new employee A contains rsus of the company with A total value of $100,000 for four years. The Offer can be vest 1/4 after working for one year and 1/16 every three months after that, so that the employee can vest all Rsus in the Offer after four years. A vest is called a “One Year Cliff” and is designed to expect employees to stay for at least One Year. Different companies have different terms. For example, Amazon’s term is 5% in the first year, 15% in the second year, and 20% in each half year after that. Snapchat’s term is 10% in the first year, 20% in the second year, 30% in the third year and 40% in the fourth year. Such term with more weight in the future is often the employer putting golden handcuffs on new employees to make them stay longer, which is not fair to employees. With such an employer you need to figure out how long you expect to stay with the company, and then negotiate the Offer to maximize your expectations for that time.

Employee A above may have such A puzzle: The Offer only states the value of RSU, but does not specify how many shares I can get. If the company’s stock rises or falls sharply, will it affect my RSU income? Generally, the confirmed number of shares occurs on the employee’s entry day, and the number of RSU shares on the employee’s Offer can be calculated according to the closing price of the company’s stock yesterday (or the average price in the recent period, depending on the company’s policy). Taking employee A as an example, the closing price of employee A on the day she joined the company was $10, so her RSU worth $100,000 for four years would correspond to 100,000/10 shares = 10,000 shares. On the first anniversary of A’s employment, she gets A quarter of that, 2,500 shares. If company X is already listed, A can choose to cash out at market price immediately on the same day (this is the fastest way to cash out but not necessarily the best). Assuming the company closes at $15 that day, A theoretically gets 2500*15=$37,500 in cash. But that’s not how it actually works. To put it simply, when you vest RSU, that income is taxed as personal basic salary income. Assuming that your personal tax rate is 40%, you need to pay 37,500 *40%=$15,000 personal income tax in advance. Most companies simply sell some of your vest stock to cover the tax advance. In the case of A, the company will sell 15000/15=1000 shares on the day of her vest, leaving 1500 shares for A to decide when to sell. At this point, A’s 1,500 shares are exactly the same as the 1,500 shares she bought on Robinhood that day, and then A Capital Gain Tax (😵) will be calculated based on her investment profit and loss and whether it has been more than A year.

Options (Option)

Unlike an RSU, which is worth whatever it gives you, an option gives you the option to buy a certain number of shares of the company at a cheaper price. Your offer letter says, “10,000 stocks with strike price at $1.00.” When you vest those 10,000 shares, let’s say five years from now, With the company valued at $11.00 per share, you can buy 10,000 shares at a very low price of $1.00 per share. So the potential value of the 10,000 shares you bought to you is 10,000 *(11-1)= 100K, but this is just the so-called paper value, and you haven’t paid a cent yet! And he paid 10,000 yuan out of his own pocket to exercise the right! Depending on your exercise income in the current year, you may even have to pay an additional amount called the Alternative Minimum Tax(AMT) for the 100K of income on your books. For details, see this article. In the example above, we assume that after five years the company hasn’t gone public, so the stock you bought won’t sell at all. Let’s say that in year 9, the company finally makes it to the public market, and after the six-month freeze period (the shares of newly listed company employees can’t be traded until six months later) at that time, the stock price is $21. At that time, the early employees can finally cash out in the primary market, totaling a profit of 10,000 *(21-1)= 200K. Of course, the 200K asset increment tax has to be paid in the long-term, which will be much lower than the individual income tax rate. Assuming 20%, the actual cash income in the final pocket will be 200K *(1-20%)= 160K. Here, we assume that the employee’s exercise shares have been held for more than one year, but if the employee sells exercise shares within one year, then this part of earnings will be subject to higher personal income tax rate 🤯

Joining early-stage startups is risky — getting acquired by larger companies is fine — and the ones that make it to market are rarely-and more aborted. In this extreme case, the employee with option has the advantage, because she can choose not to exercise, so that she does not have to bear greater losses. If it’s an employee with an RSU, because there was a wave of income taxes paid at the time of Grant’s RSU, those RSUS were worthless when the company went bankrupt, which means she paid that much more income taxes out of thin air.

Subdivided, the common forms of options are ISO (Incentive stock options) and Nonqualified stock Options (NQSO). Most early startups will choose ISO because ISO has more tax advantages than NQSO. To put it simply, for the same 10,000 shares of ISO and NQSO, when you exercise, you do not need to pay individual income tax or asset value added tax under ISO, but you need to pay individual income tax for the increment part of the current company stock price -strike price under NQSO. The advantage of NQSO compared with ISO is that American law stipulates that the maximum value of equity award under ISO can be received by an employee every year is 100K. If the value exceeds that, NQSO must be used. Of course, this rule doesn’t affect most employees, because 100K a year is a big number in a startup, and in most cases only the top executives get the package. For more detailed comparisons between ISO and NQSO, I will not expand on them here, but interested readers can refer to this article.

Another point to note about options is that when an employee leaves the company, it is stipulated in many companies that the employee must vest her options within three months after leaving the company, or they will be scrapped and recycled back into the company’s option pool. If the company develops well, the employee needs to use the cash used in Exercise to buy vest’s stock, ranging from tens of thousands to hundreds of thousands. In fact, it is very difficult for the employee to come up with such a large amount of cash within three months. Some people negotiate with the next employer to get the next employer to pay more for the sign on Bonus, and sometimes even talk about what it will take to make the next employer fully cover you. Some Silicon Valley companies, such as Quora, Pinterest and Coinbase, are trying to improve on the option handcuffs by allowing employees to vest their options three to seven years after they leave, greatly reducing the financial burden of leaving. It also provides a longer cycle for employees to choose the right exercise.

ESPP (Employee Stock Ownership Plan)

The Employee Stock Purchase Plan (ESPP) is another way that many large public companies in the United States use to motivate their employees. To put it simply, if Company X’s stock price is $100 today, employees can buy shares at a discount of 10% (depending on the company, up to 15%), or up to 25K worth of shares a year. If the employee sold immediately on the day he bought, that would be a one-time gain of 10%. Of course, the US Tax Bureau is not nothing. The value corresponding to the 10% discount given by the company to you is subject to personal income Tax. After you sell the stock, you also need to pay a Capital Gain Tax for the appreciation part.

Compared with the stock, RSUS, and options mentioned above, ESPP is closer to what percentage the 401K matches and generally does not give employees much room for wealth growth. If you really think the stock has potential, you can buy the stock directly on the open market without having to work for it. RSU and option expect employees to have the spirit of ownership through this incentive method, so as to participate in the construction and development of the company more actively and effectively.

Equity Refresh

Equity Refresh refers to the incentive renewal mechanism that a company provides to employees who have already joined the company. This is an important part that is rarely mentioned in an Offer letter. Why is that important? Imagine that X company offers A RSU reward of 100K+ usd 100,000 for four years. For A, the expected annual income for the next four years is 100K+ 25K = 125K. Suppose A accepted the Offer and worked happily for X company for two years. Then one day she suddenly realized that her annual income for the next four years was (125K, 125K, 100K, 100K)! Because in two more years her original RSU will be all vest! At that time, any company that can Offer A higher Offer than 100K is very attractive to A from the economic level, but it is actually A bad thing for X company, because A company can poach A middle-level pillar of A company casually. The purpose of Equity Refresh is to ensure that an employee has enough financial rewards at any given point in time and does not quit immediately because his Equity fast vest has run out or has run out.

How do you do that? It’s a person, a place, a time. Some companies choose to give an employee a merit increase in base salary (which can be understood as an inflation-proof, say, 3% increase) at the comp Review cycle of each full year of employment, and then issue a new RSU, also divided into a four-year VEST, The combination of the two together with the employee’s existing base salary and RSU ensures that the employee’s earnings for the next four years are very attractive. Other companies do not begin Equity Refresh until the employee has been with the company for two or three years. These are all factors worth asking and taking into account when negotiating an Offer.

Last but not least, salary is only one part of choosing a company. There are many unquantifiable factors that job seekers need to analyze and compare according to their own circumstances to maximize their future economic success and career success. If you have any questions, or what you would like to share with other friends, please leave a comment at the bottom of this article or follow my wechat public account [various__artists] private communication 😘



Reference

  1. https://blog.wealthfront.com/new-college-grad-stock-compensation/

  2. https://blog.wealthfront.com/409a/

  3. https://blog.wealthfront.com/stock-options-versus-rsu/

  4. https://blog.wealthfront.com/an-employee-perspective-on-equity/

  5. https://www.inc.com/business-insider/tech-companies-employee-turnover-average-tenure-silicon-valley.html

  6. https://blog.wealthfront.com/improving-tax-results-stock-options-restricted-stock-grants/

  7. https://blog.wealthfront.com/good-espp-no-brainer/