Compensation

The main thing to know about software engineering compensation is that it's often not based on salary only. That said, there are plenty of software engineering positions that?are?salary only, but these are more the exception than the norm. Especially in the big tech companies, equity-based compensation plays an essential role in total annual compensation (TAC).?

Equity-Based Compensation

In short, this form of compensation aims to align an individual's interests with those of the company they work for. If the company does better, the individual makes more money since their equity, or stake in the business, is now worth more. This is especially important for software engineers because of the potential impact a single software engineer can have; equity-based compensation provides the just reward for that impact.?

While at a big company, the equity is referred to in its cash value amount, such as: "I got a $200,000 grant of Microsoft stock", which will be turned into a number of shares on the date of that grant, and this number of shares will represent a tiny portion of the overall company -- but it will rise and fall with the share price, which hopefully will increase in the time you are at that company.?

In a startup, though, equity is typically referred to in percentage amounts, and it's pretty typical up until even some Series B companies to receive between 0.25% and 1% of a company's equity in a hiring grant. But, of course, depending on your experience level, you may be able to command higher percentages at existing startups. Also, if you found your own company, you can reach much higher percentages!

These grants, though, don't simply get immediately deposited into your account. Instead, the most common way they work, which is pretty standard across the industry, is to vest over 4 years. There will also typically be a 1-year cliff, which means that you must stay at the company a whole year to receive your initial equity, after which point equity typically vests every quarter.?

Using the $200,000 MSFT grant as an example, that would mean that at the end of year one, 25% would vest -- so $50,000 worth of stock, at prices one year later -- and then every quarter after that, another 6.25% of the original set of shares would vest. While this is one example, many companies do it differently. For example, Amazon has a very cash-heavy early period after hiring, with equity vesting building up over time, with their 4-year vesting schedule going something like 10%, 20%, 30%, and then 40%. In addition, they offer large cash signing bonuses, which help level out the TAC of those they hire. Other big companies do monthly vesting, but the industry norm is even, quarterly vesting over 4-years after an initial 1-year cliff.?

Calculating TAC

Equity-based compensation isn't the only element of compensation for software engineers aside from a salary: there are bonuses and benefits/perks. There are two primary forms of bonuses. The first is a signing bonus or extra cash upon starting a new position. Depending on the company, these can range from low thousands of dollars to over $100,000 (Amazon and Facebook have been known to give large signing bonuses, for example). One note, however, is these are typically contingent on at least a year at the company, with departure before a year potentially requiring you to pay it back.?

The other main form of bonus is the yearly bonus, typically based on performance, combining your performance with that of the company. Again, depending on your company, your level may have a specific bonus target, which you can use in calculating TAC. So if your salary is $200,000 and you have a 15% bonus target, and historically at your company, it gets paid out, it's fair to add that extra $30,000 to your annual compensation calculations.

While you don't always need to include them in a total compensation calculation when comparing roles with similar or equivalent benefits and perks, they often provide a nontrivial amount of cash savings that should be factored in if comparing roles with varying levels of these. For example, a big tech company offering top-of-the-line insurance might provide services you'd otherwise pay thousands of dollars for if you were a contractor and self-insuring. Furthermore, companies may have explicit spending allowances; LinkedIn, for example, provides $2,000 a year for personal expenses, such as gym memberships, dog walkers, massages, tax services, and an ever-growing list of other things.?

Bringing it all together, calculating your compensation includes salary, equity, bonuses, and benefits/perks. That's how a $200,000 salary can quickly turn into a ~$500,000 compensation package. Combine that salary with a 15% bonus target, a $100,000 signing bonus, and a $900,000 equity grant upon hiring, and that employee is making close to half a million dollars a year.?

To be explicit, that's $200,000 + ($200,000 * 0.15) + ($100,000 / 4) + ($900,000 / 4) = $480,000/yr to ensure all numbers are on an annual scale -- and it is typical to divide the signing bonus by the length of the equity vesting schedule. Without doing this, the first year is at $555,000 total comp, followed by $455,000. You might want to consider this drop in your financial planning!

In conclusion, calculating total compensation for software engineers is a skill in and of itself. Unfortunately, so many components make it hard to keep up and compare different offers. That said, it's a good problem to be compensated in so many ways!?