February 3, 2020

Tech salaries are risk premiums

This blog post was supposed to come out two years ago in response to, I think, this article. Better late than never?

After literally years of people telling me I should read Matt Levine’s Money Stuff, I finally started reading Matt Levine’s Money Stuff. One takeaway from this is that I am susceptible to social pressure if I respect the people applying the pressure highly enough. The more interesting takeaway is the conversation I had with Asheesh Laroia immediately after reading a particular edition of Money Stuff.

Asheesh: risk premium” is a powerful concept, and I really love that Matt Levine gets that.
Me: All tech salaries are risk premiums in both directions.
Asheesh: o_0 I need like a 3 sentence version of that.

Here’s the much-more-than-3 sentence version that started in my head and ended up as a collaboration between Asheesh and I.

Let’s say you work in tech. The average tech company wants to pay you the minimum they can. This is not unique to tech companies, all companies want to do this, but the example here is tech. They pay you more as a risk premium to keep you from leaving, which can be a substantial risk to the company. You, average tech worker, know in your head the absolute minimum salary you’ll take, but aim far higher than that in job search and negotiation as a partial risk premium against getting fired, going broke, and the cut you’re taking from not working at AppAmaGooFaceSoft.

That not working at AppAmaGooFaceSoft” is a pretty important bit here. The risk you and your potential employer are guarding against is modulated by your actual ability to work at AppAmaGooFaceSoft, which probably neither you nor the company you’re trying to work for have evaluated well. At the very least, that possibility is opaque to your potential employer. This is the kind of low-knowledge, high-risk situation well-suited to risk premiums.

Here’s where it gets interesting: AppAmaGooFaceSoft could decrease average tech salaries by promising to interview everyone within some timeframe of you applying, effectively calling your bluff to the person across the table from you. If AppAmaGooFaceSoft says they’ll interview everyone who applies and get back to them in a 48 hour window, with a 48 hour exploding offer, then everyone would know if you were bluffing with your pretend invisible AppAmaGooFaceSoft offer for more than a week.

Taking this further, imagine AppAmaGooFaceSoft enacting a hiring freeze from May to September. All of recruiting decides to take the Summer off, and no one gets in the door. During those months, if you’re job shopping, it means you have no credible likelihood that AppAmaGooFaceSoft is someone a company should be competing against, and therefore you have less negotiating power than you do during the months AppAmaGooFaceSoft is hiring.

Let’s keep going! 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.

Of course, this only works if all of AppAmaGooFaceSoft do this simultaneously. If Facebook stops hiring, Google will pick up the slack. If Amazon stops hiring, Microsoft will happily absorb many of those workers.

There’s an interesting corollary for you, the person not applying to AppAmaGooFaceSoft: You want those tech mega corps to succeed, and keep driving salaries up, even if you don’t work for any of them, because they’re helping to lift your salary at Random Startup, Inc.

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.

startups salaries AppAmaGooFaceSoft

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