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Why Coders are Paid so Much?

Woman Sitting on a Couch in front of a Laptop and Covering Her Face with Money 

INTRO: Recently, I was recommended a article called “How Much FAANG {(Meta (META) (formerly known as Facebook), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG)} Pays Software Engineers In 2022”. Now, we all know that FAANG software engineers make a fat salary, so I went into making a article expecting $200 to $300,000. But, I was blown away by how much these guys actually make. Take Facebook for example. An entry level software engineer themself nearly crosses $200,000 per year. With just 2 promotions this nearly doubles to $400,000 per year and we’re only half way through. If you make it to level 7, you’d be making nearly a million dollars per year, and if you make it all the way to level 8 which is principal engineer, you’d be making $1.6 million per year.

A very similar pay scale can be found at Google and most other silicon valley companies as well. Now, let’s be clear here, we’re not talking about VPs or C suite executives. We’re talking about high ranking coders like IT directors and they’re pulling in 7 figures. For perspective, there are literally CEOs of everyday brands that make a comparable amount. DISH CEO Erik Carlson, for example, made $2.9 million last year. And he’s literally the CEO. If we take a look at lower ranking C suite executives, many of them actually make less than these FAANG software engineers.

Stuart A Levy for example is the CFO of Domino’s pizza and he “only” made $1.57 million last year. Also, we should note that Domino’s pizza was literally the second fastest growing stock of the 2010s, only beaten out by Netflix. So, these executives beat Facebook, Apple, Amazon, Google, and the rest of the fortune 500 in terms of stock growth for an entire decade. Yet, their compensation is literally lower than principal engineers at FAANG. Either the executives at these second tier companies are getting ripped off or FAANG is just flexing. Historically, the most straight forward way to become rich at a young age without starting a business was to grind out your 20s at an investment bank or hedgefund.

But, it looks like FAANG has completely thrown that out the window with their compensation packages. For a highly ambitious individual who is recruited straight out of college or even without college, 2 promotions at FAANG seems pretty reasonable within 10 years meaning that they could be earning nearly $400,000 in the 30s. And here’s the cool thing, that’s a 2022 salary. By the time you actually spend 10 years in the industry, this salary would probably be closer to $6500,000 per year if not more. Even if you only get one promotion after that, you’d probably making close to 7 figures if not 7 figures.

In other words, if you become a software engineer today and make it into these top tier companies, you have a solid chance of making 7 figures by the time your in your 50s. Seeing this, it’s no wonder why so many people are choosing to major in computer science or STEM in general. But, this begs the question, why are software engineers paid so much in the first place? CODING SHORTAGE: This might be hard to believe, but there’s actually a massive shortage when it comes to software developers. In fact, as of 2019, there were 1 million unfulfilled IT jobs in the US.

At first glance, this probably makes no sense. Nowadays, there’s such a massive emphasis on understanding code even if you’re not pursuing software engineering. I mean, even elementary schoolers are being taught code. And as you go into middle school and high school, there’s dozens of classes for coding that are usually filled to the brim. And as for college, if you’re getting any sort of STEM degree or even a business degree at this point, it’s basically impossible to graduate without taking atleast 1 or 2 coding classes. And all of that is just within academia itself.

Outside academia, we have hundreds of bootcamps and courses on Skillshare and Udemy. Not to mention the tens of thousands of free videos and articles available on YouTube and Google. Also, it’s not like the average person is ignorant to coding either like they were back in the 1980s. Virtually everyone in the world understands how important computer science is to the modern world and how lucrative a CS career could be. Considering all this, you would think that there’s an oversupply of developers, yet this is not the case. So, what is creating this disparity between how many people learn coding and how many people actually get a job in coding?

Well, at the root of it, there can only be two explanations for this: it’s either the employer’s fault or the employees fault. Maybe the employers are being too picky or expecting too much. But, when you look at the data, this is simply not the case. Most tech companies have actually been lowering their standards like dropping degree requirements. Now, you can argue all you want that these tech companies still prefer college graduates, but that’s besides the point. This article isn’t about whether college is worth. The point is that these tech companies are objectively making it easier to get a job with them.

Some research from Indeed further confirms this. 80% of US tech managers have selected candidates that graduated from a coding boot camp program. And 99.8% of them are willing to hire similar candidates again. So, if anything, employers are desperate and this is extremely evident in their highly generous compensation programs. But, if the shortage isn’t caused by employers, that means that it must caused by employees, and that’s exactly what’s happening. The coding industry as a whole has a massive churn problem. Developers come in, they stay for a few years, and then they leave.

The average tenure at all of the top companies is literally at max 2 years. Now, of course, tenure is skewed by new hires, but it’s not like turnover would be that much better anyway. I mean, high turnover at these companies is not a secret. We have a full article about this phenomenon if you’re interested, but at the crux of it, more times than not, coders just get burnt out. This is simply worsened by the fact that a substantial number of developers don’t like to code to begin with. The only reason they pursued a CS job is because their parents told them or because the career made sense to them objectively from a money or prestige perspective.

But, when it comes to the job itself, they’re not actually that excited. After all, you just sit in front of a computer for 8 hours a day and browse through stackoverflow. Even for the people who like coding, they usually don’t like the coding they have to do at Facebook and Google. It’s not like they’re building the next Instagram or YouTube. More times than not, they’re banging their heads on the wall trying to refine a data sorting algorithm or fixing menial bugs. And after 40 years, they don’t really have much to show for any of it.

What are they gonna say, I made the Facebook experience indistinguishably better? Now, this isn’t to say that all software engineering jobs are bad. The type of coding jobs that people actually like are found at startups where they can actually play an active role in the final product. And people are usually more than willing to take a paycut to do something that they feel is more meaningful. And to minimize this phenomenon, FAANG companies are usually forced to pay insane salaries. FREE MONEY: Not only are tech companies trying to attract and retain developers during a programmer shortage, but they also have tons of money to throw around.

This is thanks to the insane margins that are unique to the tech industry. Facebook has net margins between 25 and 30%. Google also has net margins between 25 and 30%. Meanwhile, Microsoft has net margins of nearly 40%. With such margins, these companies can raise salaries faster than any other industry. Take fast food for example. There’s a massive shortage when it comes to fast food workers as well. But, due to the limited margins in this industry, salaries can’t go up all that much. Even Starbucks with their $6 coffees only profit 10 to 15%.

Not only do tech companies have far higher margins, but they also have far fewer employees meaning that their profit per employee is through the roof. Google’s profit per employee is $297,000. Apple’s profit per employee is $390,000. And Facebook’s profit per employee is nearly half a million dollars. The median salary at Facebook is currently $292,000. This means that they could literally increase the pay of all of their employees by $400,000, and they’d still have a $100,000 worth of profit left to spare. In other words, they could pay entry level developers $600,000 if they wanted to.

If we do this same math for Starbucks though, it simply doesn’t work out. Before Starbucks drastically reduced their workforce due to the pandemic, their employee count stood at 350,000. And on good years, they profit as much as $6 billion. This, however, only works out to a profit per employee of a little over $17,000 per year. This means that Starbucks could only increase pay by $9 per hour before having to charge like $10 per cup of coffee. This is why we don’t hear about Starbuck baristas being paid six figures due to the fast food shortage, but we do hear about software engineers being paid seven figures due to the developer shortage.

Also, that’s just half the story. Something else to note is that the vast majority of the high compensations from these tech companies are stock based compensation. If we take a closer look at Facebook’s 7 figure salary, we’ll see that only about $400,000 of the $1.6 million is actually offered in cash. The other $1.2 million is offered in stock. Not only is stock compensation great for employees given that they’re investing hundreds of thousands if not millions into the fastest growing companies in the world, but it’s also great for companies because it’s almost free.

Here’s the thing, it’s not like these companies go onto the stock market and buy these shares at market price. Instead, what they do is dilute existing shareholders to issue new stock to employees. And it turns out that this is extraordinarily cheap because it doesn’t come from their bottomline, it comes from their marketcap. For example, let’s say Facebook wanted to increase their salaries by $100,000 to attract more talent. If they increased the salaries of all 72,000 employees by $100,000, this would cost them $7.2 billion per year.

This is quite an amount, but Facebook could comfortably afford it with their $40 billion net margin. It would cost them about 18% of their profits. If they offered the $100,000 in the form of stock, however, the cost would be relative to their $393 billion market cap. And $7.2 billion would only cost 1.8% dilution, and that’s with their stock falling off a cliff. At their peak market cap of $1 trillion, this extra compensation would’ve only cost 0.66% dilution. Not to mention, employees are usually restricted from selling for a few years, so this dilution wont even hit the market for years.

This is why companies love stock compensation. It improves employee loyalty, employees make a lot of money, companies can hand out stupid amounts, and it doesn’t cost them much. The one caveat to this though is that your company has to be growing at a rate at which this dilution would be inconsequential. So, stagnant companies like AT&T or Cisco or Intel can’t leverage this all that much. But, the FAANG companies, well they go to town. PURSUING CS: At the end of the day, the reasoning behind insane software engineering salaries isn’t rocket science.

There’s a shortage of talented software engineers because talented developers don’t really like to hang out at big companies and do menial work. They far prefer to invent or build something themselves. So, these companies are having to one up each other in terms of pay to retain their developers. And with insane profit per employee and access to easy stock compensation, when these companies try to outdo each other, salaries basically become a game score instead of money. The funny thing is that these companies still have an insane amount of headroom.

Honestly, between sacrificing profits and dilution, I think Facebook could even afford to pay median salaries of a million per year. Now, I’m not saying that they should or that they will, but they could mathematically. So, if you’re looking for a straight forward way to make a stupid amount of money, CS is definitely the way to go. But, be warned that the work is not only difficult but rather monotonous and oftentimes unfulfilling. Do you think coders are overpaid? Comment that down below.

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