10% Engineer Guide to Compensation Package
And their nuances
In this article, we will try to lay out all the important components you’ll get from your employer that will increase the 💵 in your bank accounts (or save them). Before we discuss the components of compensation, let’s discuss three important elements you will want to consider for choosing compensation:
Amount: how big is the total compensation in dollar number. A higher amount (read: more money) is better.
Liquidity: whether you can spend them right now for a cup of coffee (liquid) or do you have to go through some process (not liquid). Some examples of processes to liquidate your compensation: selling it through brokerage, selling it through a secondary market, wait for 3 months. More liquid is better.
Tax implication: whether you have a special tax implication by having them right now, or a year later where you might get more favorable tax implication. This depends on the country where you work in. Less tax implication is better.
Also, this is not tax advice. Please don’t sue me.
With that laid on the table, let’s get started!
🤝 Sign-on Bonus
The company will compensate you upfront for joining them and ask you to stay in the company for a while if you want to keep the money. This is called a sign-on bonus. Usually, the amount is not huge. But it’s a good way to attract talent who loves quick cash.
🤑 Performance Review Bonus
Performance review bonus is, as the name says, distributed after a performance review is done. This will be a merit-based cash bonus you’ll get either once per year or once every 6 months (depending on your performance review cycle). The amount depends on your performance, your company performance, and your seniority/title.
📈 Stock Grant aka Restricted Stock Unit (RSU)
Stock grant is where you’re granted some amount of equity of the company you work in. Usually, there will be a cliff and vesting period (typically monthly, 3 months, 1 year) until you own and can sell them.
The equity can be sold in brokerage if the company is public, allowing you to get your money in a day. If the company is private you’ll need to sell them in a secondary market which is less regulated and significantly less liquid.
Depending on your seniority and your market you’ll get most of your money in this form. This is in line with the company preference: delaying cash compensation as long as possible to allow more liquid capital for them.
📉 Stock Option
Stock option is a piece of paper that tells you “you have the option to buy this stock (or do nothing about it) for Y price.” The benefit of having a stock option is you can buy the actual stock (aka exercising the option) for a lower price compared to market value.
For example, you were given the option to buy 2,000 shares of Palantir for $10 per share when you join Palantir as part of your agreed compensation. Then you work there for a year and Palantir went into IPO. As of today (21 Sep 2021) Palantir stock is priced at $26 per share. This means if you exercise the option today you are getting:
$26-$10 * 2,000 = $32,000
Similar to stock grants, depending on your seniority and your market you’ll get most of your money in this form. The problem with the stock option is it is not liquid and usually can only be sold in the secondary market. Otherwise, the company would’ve compensated you with a stock grant instead.
Interestingly enough, there’s a significant amount of stock options not exercised due to the tax implication to liquidate them. You can read more in this article.
⛱️ Amenities and Benefits
Amenities and benefits are all the stuff you receive that doesn't really go directly to your bank account. The best way to explain what amenities and benefits are by listing their examples:
Time off policy
Maternity and paternity leave
Food at office
Company voucher or discount
There are way more amenities that I haven’t mentioned (gym membership, 401k/pension fund matching, getting IVF treatment paid by the company, relocation bonus). But I won’t discuss it exhaustively because there’s a saying that will drive us away from the 10% engineer principle:
Collecting airline miles is coupon-clipping for the middle class.
Tax avoidance is coupon-clipping for the upper class.
Comparing amenities and benefits is coupon-clipping for white collar.
10% Engineer Recommendation
This will depend on your risk profile (are you married, do you have kids, how much money do you have in the bank), your stage in life and career, and possibly many others. So this recommendation is coming from someone with a pretty high risk profile, married with a kid, has a considerable amount of money in the bank.
Amount trumps everything. This means take as much combined compensation as possible.
I have never been in a company where the company managed to exit while I was there during the exit. So stock options are worthless to me. I hope my opinion will change in the future and this is an experiment that I am conducting right now.
I don’t value amenities and benefits too highly. I have never been to the doctor for 7 years I was in the US no matter how sick I was. I took free lunch for granted. So I don’t count them into the equation. This increasingly shifts as I grew up and my family situation changes. For example, I am now looking more at paternity benefits and insurance for my family. Because while I am physically fit, my baby isn’t.
I’d also really consider the tax implication it has on my overall income. If I were to go back to the US I’d probably live just fine with $200,000. Thus I would rather have the remaining significant amount of compensation be in stocks (option or grant) so I can reduce the tax implication from 45% down to 15% if I hold them long-term.