Ranking among the highest-paying employers, are Silicon Valley firms going overboard in luring talent? In 2015, America’s tech companies paid around $40 billion in stock-based compensations. That’s an estimated 60% higher than the aggregate bonus given to Wall Street banks’ employees, as suggested by the Economist.
Several mid-career executives at the largest technology companies such as Apple, Google and Facebook get paid millions of dollars annually, including stock compensations. Not just that, entry-level engineers at Silicon Valley firms can easily pocket $120,000 a year, more than what a similar age-group usually earns on Wall Street (Source: The Economist).
According to a survey by UC Berkeley’s former student Rodney Folz, even a summer intern at some of the biggest U.S. tech firms earns a median monthly base salary of $6,800 for an engineering job. When annualized, the figure comes to $81,600 – almost 77% higher than national average wages of $46,119.78 in 2015, as computed by the Social Security Administration.
Even as non-tech S&P 500 firms pay less than 1% (on average) of their revenues as stock-compensations, technology behemoths shell out 5% on average. Facebook and Twitter paid out 17% and 31% of their sales as stock-based compensations, respectively. Alphabet gave away $5.3 billion – 20% of its gross profits.
Apart from the high living costs in California (Bay Area’s 41% more expensive than the national average, as suggested by Brant Shelor of Mercer) as a factor behind lofty salaries, tech firms’ vying for the best talents could be fueling more rewards/pay hikes in the sector. It’s rumored that in 2011, Google laid out a $100 million stock offer before senior executive Neal Mohan to keep him from moving to Twitter. Amazon offers large stock-compensations upon an employee’s completion of the third or fourth year with the company. Bonus as a retention incentive is reportedly common in Apple, Google and Facebook.
Will Incumbents’ Fat Paychecks Thwart New Entrants?
With big names shelling out big tips to employees, where does it leave start-ups? Unicorns – that is, larger start-ups valued over $1 billion – are also offering handsome stock-grants to workers in exchange of the latter serving at least four years with them. In trying to procure workers against bigger players’ alluring paychecks, absolute neophytes or smaller start-ups could be challenged, and perhaps see their funding requirements soar – something which could entail added pressure on these beginners to prove their earnings potential before prospective investors.
Bottom Line for Investors
Silicon Valley’s generous mood towards employee compensations shouldn’t hurt if it translates into higher worker productivity. But, in the race to outdo each other, some tech-firms might be going too far in their munificence towards employees – something that could restrict those companies’ spending capacity in other areas and even squeeze their profit margins.
That’s why investors need to be highly selective when picking tech stocks for their portfolio. At Zacks Investment Management, we can help you make this selection by offering an in-depth analysis on companies’ fundamentals, so you can optimize your portfolio for long-term returns without compromising your risk tolerance. To learn more, contact us today at 1-800-245-2934 at no charge to you. In the meantime, to get insights on various market sectors, you can download our latest Stock Market Outlook, by clicking on the link below:
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