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Salary Negotiation for Software Engineers — Understanding the Compensation Structure

Posted on 
November 11, 2021
|
by 
Team Interview Kickstart

One of the factors that software engineers often ignore during the interview process is salary negotiation. Companies, especially big tech companies like FAANG, do not shy away from paying lucrative salaries to deserving candidates. That’s why it’s important to build a good salary negotiation strategy as a part of your interview prep.

Before everything else, you need to understand the structure of compensation offered at FAANG and tier-1 tech companies. The compensation packages vary as you progress up the career ladder. Negotiating your compensation requires an understanding of what constitutes the compensation offer made to you. 

The difference between cash and stock components significantly increases as one moves from junior to mid to senior-level positions. Compensation packages comprise higher stock or equity components at senior levels or jobs that pay $500k and above. 

We delve into the components of total compensation and how to approach negotiations for each one:

  1. Cash
  2. Stock
  3. Other Perks and benefits

1. Cash

This is the liquid component of your compensation, i.e., the actual amount paid to you, either on a recurring or one-time basis. If you prefer or require liquidity to meet cash expenses, you should negotiate a higher cash payout. Some companies limit their cash components while others are flexible with it. 

Base Salary

This is the fixed component of your compensation paid regularly during your tenure with the company. Companies generally work within salary bands that limit the amount a company can offer you for a particular position. You can expect a high base salary for a high-level position. 

However, the range of base salary offered narrows as you go higher up the career ladder. 

Try to negotiate for a base salary at the higher end of the relevant salary band. This will have a positive impact on future earnings. Salary hikes and bonuses are based on base salaries. A higher starting salary will compound to yield higher gains over a period of time. 

Suppose you accepted a job offer of $70,000 instead of $90,000. Assuming a 5% raise every year, what will the difference be in 5 years?

After five years, the difference in earnings (cumulative), considering salary hikes alone, will be $110,514, which is a significant amount.

Joining or Signing Bonus

This is a one-time inclusion in your compensation package paid out either as a lump sum at the time of joining or in a prorated manner over time. Not all companies include a joining bonus in their offer. The joining bonus can vary quite a bit among those that do, leaving a lot of room for negotiation. 

Sometimes, companies leave out signing bonus amounts in their offer, expecting candidates to negotiate for the same. Negotiating a higher bonus amount can increase the cash component of your total compensation.

If your current company offers a retention bonus, or you have competing offers, you can use these as leverage to increase your signing bonus at the prospective company.

Companies add a signing bonus amount to make your overall compensation offer appear attractive.  However, remember that when paid out as a lump sum in the first year, your overall compensation figure will stand reduced by the same amount in the following years.

Annual or Performance Bonus

Performance bonuses are usually calculated as a percentage of your base salary and added to your cash earnings. Unlike your base salary, the bonus is a variable component that depends on your and the company’s performance. However, you can estimate a certain percentage as an achievable amount that you will receive every year.

It’s not uncommon for engineers to earn bonuses higher than their annual targets. This component varies widely between companies. Performance targets are set based on levels and are usually non-negotiable. However, estimating this component will help you understand its impact on your overall compensation on an annual basis and help you compare offers.

2. Stock

Engineers who break out of the mid-level plateau see compensations increase exponentially. This is mainly because at senior levels or for high-paying roles, the compensation structure goes from cash-heavy to stock-heavy. 

Stock is usually highly negotiable as stock bands are broader at senior levels.  Stock forms a part of the non-cash component of total compensation. However, this amount can substantially increase the cash component of total compensation for the year in which it’s cashed.

Equity/Restricted Stock Units (RSUs) 

Employees are given shares in the company for a certain value (based on the stock price at the time of offer) as part of their total compensation. These RSUs (Restricted Stock Units) can be encashed after a vesting period. This will increase the cash component of total compensation in the years they are encashed. 

Compensation at some companies, e.g., Netflix, tends to be more cash-heavy, while at others, e.g., Amazon, it's more stock-heavy.

Most companies follow a four-year vesting period with an equal number of shares vesting each year. However, some companies, e.g., Amazon, follow an atypical schedule, i.e., a different amount of shares vest each year.  Although stock bands are set for a particular level, this component is usually negotiable. 

Stock performance affects the value of the stock. Consider the value of the stock you receive in your offer to ascertain how it affects your compensation during the vesting period. Startups and other top private companies may also offer large equity stakes to make their offers lucrative. Still, equity at FAANG companies can be easily traded and is, hence, considered more valuable. 

Top 20 tech companies by market cap (publicly-listed):

  • Apple
  • Microsoft
  • Alphabet (Google)
  • Amazon
  • Facebook
  • Tencent
  • Alibaba
  • Tesla
  • TSMC
  • Samsung
  • NVIDIA
  • PayPal
  • ASML
  • Oracle
  • Intel
  • Cisco
  • Netflix
  • Broadcom
  • SAP
  • Qualcomm

Refresher Grants or Stock Refreshers

These are additional RSUs given to employees who were given an initial grant of RSUs. These are usually performance-based grants at FAANG companies. This component can vary widely between companies. To understand their effect on your total annual compensation, you should try to ascertain how stock refreshers are granted at your prospective level.

3. Other Perks and benefits

This includes cash or cash-equivalent payments made for one-time or recurring expenditures offered as part of your overall compensation. Once you’ve optimized your pay for cash and equity, you can negotiate further for perks and benefits.

  • Perks: This includes payments for relocation expenses, commuter allowance, phone, other reimbursements, etc. 
  • Benefits: This includes employer-sponsored expenses and contributions such as health insurance, contributions to 401k plans, paid time off, etc. 

Once you understand the structure of the compensation package offered, you can better negotiate the various components to achieve your desired compensation mix. In some cases, we’ve observed that deserving candidates have been able to increase their compensation offer over prescribed salary and stock bands through skilled negotiation. 

Alternatively, if you can’t negotiate any higher in terms of the total amount of compensation offered, you can try to negotiate various components to arrive at a preferred compensation mix.

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