On Salary, Bonuses, Options, and Stock

Most desk-bound programmers earn their living from a few main sources: salary, bonus, options, and stock. Today let’s talk about these components of income.

Salary

Here, salary means base salary in the strict sense: the money that goes straight into your hands every month, with no dilution. When you receive an offer letter, you must understand its income structure. Otherwise, some compensation packages may look beautiful on paper, but if a large portion consists of bonuses or options that you can see but may never actually receive, you need to weigh them carefully.

Salary is backward-looking; it is a recognition of your past work experience and technical ability. Precisely because of this lag, you needn’t complain that you’re earning cabbage-seller’s pay while carrying a heroin dealer’s burden; nor should you grow smug about a high income—the higher you stand, the harder you fall.

If this is hard to grasp, compare the salaries of football stars. When Adriano was loaned by Inter Milan to Parma and produced a dream season, he was earning a relatively low salary (astronomical by our standards, of course). After a blockbuster transfer back to Inter, he immediately received a very attractive salary. He then delivered performances worthy of the “King of the Meazza,” and duly earned a king-level top salary. Unfortunately, scandal followed scandal, he wasted his talent, his luster faded, he was exiled and released, his salary fell lower each time, until eventually he had no club to play for and no one asking after him.

So when you’re paid 3,000 yuan to do 10,000 yuan of work, don’t rush to complain that your boss is unfair; he may already see your market value and be preparing to raise your pay.

When you’re paid 30,000 yuan to do 10,000 yuan of work, you should feel a sense of crisis. Companies are profit-seeking. If you keep failing to deliver value commensurate with your pay, why shouldn’t they replace you with someone cheaper and younger?

Note that if you consistently demonstrate ability beyond your market value, raises come step by step; but pay cuts happen in one step—to zero. The company will ask you to leave. From a psychological perspective, people are very unhappy when deprived of what they already have. So rather than cut your salary, leave you sullen, and perhaps make your performance worse, wouldn’t it be simpler to just lay you off and be done with it?

So for programmers entering middle age, the greatest fear is a recession: being laid off all at once, with the economy weak outside, layoffs everywhere, unable to find a suitable job, left to sigh in desolation: “Circling the tree three times, on which branch can I rest?”

In a previous article I mentioned that programmers should test their market value every year or two. This helps you understand your worth. If your value is growing but your boss ignores it, don’t be afraid to take a new offer and negotiate a raise with your boss. A good boss should understand and respond properly to an excellent employee’s question: “If I were to leave, what would you be willing to pay to keep me?”

Bonus

Salary represents your past ability; bonus reflects your boss’s current expectations for you. It should be a tool for adjusting your income: if your performance exceeds your boss’s expectations, the excess should be cashed out as bonus—the more you exceed, the bigger the bonus.

Unfortunately, at the companies I’ve worked for and those I know, bonuses are an awkward institution—many companies cap bonuses as a percentage of base salary, so their adjustment power isn’t strong; the managers who deploy them don’t know how to use them properly; over time, bonuses gradually become an appendage of salary, as reliable as salary, rain or shine, drought or flood—guaranteed, more or less. At that point, bonuses lose their intended value.

The relationship between salary and bonus should be like this: if your market value is 100,000 yuan and the company pays you a 100,000-yuan salary, but you perform outstandingly this year, repeatedly exceeding your boss’s expectations and delivering 150,000 yuan of value, then your boss gives you a 50,000-yuan bonus. Your total income for the year is 150,000 yuan. Next year, your boss raises your salary to 150,000 yuan, and expectations rise accordingly. If you again deliver 150,000 yuan of value that year, your boss will give you no bonus and no year-end raise.

Of course, this example is armchair theorizing. Your boss is not an actuary; he can only estimate your value and how much bonus and salary to give by feel (so programmers must learn to show results at the right time—don’t do 200% of the work while your boss thinks you did 20%).

The timing of a bonus is an art—if it is not paid at the most reasonable moment, its value is greatly diminished. It’s like an animal trainer training a dolphin: if you expect your dolphin to leap high from the bottom and perform a difficult, graceful somersault in the air, then when it does so, you must immediately give it a special reward.

Options and Stock

Unlike salary and bonuses, options and stock are deferred income: what is granted this year may not vest 50% until two years later; then 25% vests in each of the remaining two years, until fully vested.

Listed companies grant options when their overall development is on an upward trend that outperforms the industry. Because the company is growing quickly, its stock value keeps increasing, and only then can deferred option gains be very valuable. In this process, options create a great deal of value for employees, sometimes far exceeding their income from the company. This is the wealth-creation capacity unique to emerging industries, especially the internet and software industries.

Listed companies issue restricted stock units (RSUs) when overall growth moderates and is in line with or even below the industry. Options mean little in a company that is no longer growing quickly—if the stock price is $20 when you are granted options and still $20 when the options vest, the options are basically no different from waste paper. RSUs are different: however many RSUs you are given, you have the right to sell them on the market after the vesting period and keep the full proceeds (taxes apply, of course).

Startups also grant options to employees through employee stock ownership plans (ESOPs), but the risk is far greater than with listed companies: 95% of the options granted by startups end up as waste paper. Of course, greater risk also means greater reward. To attract talent, startups often grant tens of thousands of options—even options representing a certain percentage of total share capital—to core employees. Thus, once the company goes public, the wealth-creation effect is much greater.

A good programmer should, on top of these income streams, develop other business—for example, taking on some side gigs in their spare time that can improve them (not just programming). Money is secondary; the important thing is to exercise some basic abilities. However, that is beyond the scope of this article.