How compensation works posted on 10 May 2024

There are a lot of articles written around how compensation works that are fairly misleading (on purpose or not?) and many of them dismiss how compensation actually works.

Compensation is computed based on a few factors:

  • First and foremost the job market you are – if you live in the San Francisco bay area, your compensation will be higher than if you live in Austin
  • Your impact on the company – this is basically your level/role
  • The market your company competes in – this is not only the revenue your company brings today but also the revenue it can bring if it is successful at capturing most of the market.
  • The role and value of engineering in your organization – e.g. in a SaaS company, engineers will be paid higher than in a company where software is not as critical (e.g. a real estate company, a hardware company etc.)

A few more colors on each of these factors

  • While you can move and increase your compensation, it might not be an option available to you. It is also worth keeping in mind that usually high compensation is tied to high living cost areas. Don’t fall for the marketing reasons like Washington/Texas not having income tax – you still pay taxes one way or another
  • Your level is how you can increase your compensation without changing companies. Once you have found a good company, this is the fastest way to increase your compensation – while you may be able to get a bit more money if you complain/ask for it, this will be ephemeral peanuts compared to the bump you get if you get promoted. Beside level, trajectory/growth/potential also matters – a L(n) with a strong growth trajectory will be paid much more than a terminal L(n).
  • The other 2 factors are properties of the company – this is what you should consider when looking for new opportunities (in addition to other aspects of the job you care about)

Last but not least, compensation bands are never strict in my experience even in large companies. They are strict-ish guidance that VPs can overwrite as needed – but this is the topic of a future post.

Don’t forget that compensation is not the only thing you should consider. I personally wouldn’t join a toxic company no matter what the compensation is.

LinkedIn post