So, you’ve received a job offer from Google (or Meta/Microsoft/Uber/etc). First of all, congrats! All that hard work has paid off, and now all that’s left to do is for you to sign your new offer, and go on with your life.
But what if you have several offers to choose from — or if you are trying to figure out how this new compensation compares to your current job that might come with a very different pay structure?
That’s what this post is going to be all about.
Note #1: For those of you already working in technology, most of the information in this post might sound quite familiar; however, from talking to people over the years, I’ve found that even for those already working in the industry for some time, there are certain nuances of this that are generally not very well understood — I’ll do my best to cover & highlight those.
Note #2: Also, information from this post is going to be useful for those considering offers from what’s generally known as ‘big tech’ and also some of the late-stage pre-IPO startups. Early-stage startups are a bit different — so instead of trying to cram every bit of information in one post, I am planning to write another article covering early-stage startups — if you’re interested in those, just stay put.
Establishing terminology
All right, let’s dive in!
First of all, here is a bit of terminology that’s going to be useful to understand:
Total compensation (TC): the total amount you should expect to earn per year; it typically consists of:
Base salary: your regular pay, paid weekly/bi-weekly/monthly
Annual bonus: typically performance-based & paid at/after the end of the financial year
Annual equity compensation: annual $ value of the equity you will get (from both the initial grant & refreshers)
Sign-on bonus: an extra bonus you might receive in your 1st and/or 2nd years
Equity grants: the amount of equity you will be granted in the company
Initial equity grant: the initial amount of equity you will receive when starting the job
Equity refresher: additional equity grant(-s) you’ll get while working (typically granted on the annual basis, but can also be one-time grants)
Vesting: the process of your granted equity actually becoming yours over time
Vesting schedule determines the exact mechanics & timeline for your equity getting vested
Vesting cliff is a special condition determining when the first portion of your grant will vest
Going forward, I’m going to use the data from levels.fyi for illustrative purposes in this post.
If you are not yet familiar with this resource, it contains thousands of crowdsourced data points detailing compensation packages for all major tech companies (and many of the startups), and it also provides indispensable data on how leveling systems used at different companies align with each other (I intend to write a separate post on this topic soon).
While not flawless, this information can be extremely helpful to candidates at multiple points during the recruiting process, such as setting upfront expectations with the recruiters, negotiating compensation after receiving the initial offer, and many more.
Understanding the basic calculation
At its core, total compensation calculation looks quite simple:
Total compensation = Base salary + Annual bonus + Annual equity compensation + sign-on bonus for that year (if applicable)
Let’s dig a bit deeper to see how each component in the formula above is calculated.
Base salary
Base salary is fairly self-explanatory — it’s typically just a number that should be clearly listed in an offer. Base salary is largely determined by the level your offer is made for, although there is usually some degree of variability within the level, to allow for higher base salaries for experienced candidates, and also to create some room for future pay increases.
Using Senior Software Engineer (L5) at Google as an example, looking data from levels.fyi, it looks like the average base salary for that level is roughly $195k, with the range (excluding some outliers) of $180k-$210k for L5 level.
Annual bonus
Next, let’s talk about the annual bonus. Annual bonus is typically is calculated using the following information:
Base amount: fixed $ value, or (more often) % of annual base salary
Multiplier: applied to the base amount & typically performance-based
Again, using Google as an example, the base annual bonus for L5 there is typically set at 15% of the annual base salary. Some companies, such as Uber, will use a $ value instead — for instance, base annual bonus for L5 at Uber will typically be around $35,000 (note that with an absolute $ value, the number will probably get adjusted every few years).
Typical bonus multiplier usually goes from 1.0x to 2.0x of the base amount, and will depend on both the company performance & individual’s performance (sometimes, the two will be clearly separated, but more often, there will be just a single multiplier). Multipliers above 2.0x or below 1.0x aren’t very typical, but those do occasionally happen — e.g., at Microsoft, if you are underperforming, you bonus multiplier might go as low as 0.6x.
Equity compensation
Finally, we get to the annual equity compensation. That’s where the things get a bit more tricky.
First, when you start a new job, you will typically receive an initial equity grant. On your offer, this will typically be specified as a certain $ value, to be converted into shares using the stock price at some date soon after you start (e.g., often it’s the 15th of the month you start, or the next month; it could also be the average price for that month).
This initial grant will then vest over a number of years, with each vested portion becoming yours if you’re still with the company by then (if not, all unvested stock is usually forfeited after your last day of employment).
The above may sound pretty complicated, so let me illustrate this with an example.
Let’s say you’re joining Meta as a Product Manager at L6 level. The size of initial equity grant can vary quite widely — but let’s assume you receive an $900k initial equity grant (not an unreasonable number for L6 PM at Meta).
Here’s how the mechanics of your initial grant will look like:
Initial equity grant size: $900k
Vesting timeframe: 4 years
Vesting schedule: quarterly vesting schedule, with 6.25% vesting each quarter (or 25% per year)
This means that you will receive $225k ($900k / 4) worth of stock per year from your initial equity grant, provided that Meta stock price stays the same.
Some companies (e.g., Google & Uber) use a front-loading vesting schedule, meaning that more of your grant will vest in the first couple years after your start date — e.g., Google uses 4-year vesting schedule, with 33% / 33% / 22% / 12% of your initial grant vesting in the 1st, 2nd, 3rd & 4th years respectively, while at Uber the schedule will look like 35% / 30% / 20% / 15% of your initial grant vesting in each of the 4 years.
Similarly, some companies might choose the opposite approach called back-loaded vesting, with Amazon being the most famous example. At Amazon, you would see 5% of your grant vesting in the 1st year, 15% vesting in the 2nd year, and 40% vesting in both the 3rd & 4th years. To compensate for back-loaded vesting, Amazon typically offers sizable sign-on bonuses paid in the 1st & 2nd years, provided that you remain with the company during that time.
Regarding the mechanics determining how the equity grant gets converted from $ value to shares, let’s say you decided to join Microsoft in August 2022, and your initial grant was $250k. In that case, your grant got converted to shares using the share price on September 15th, 2022 (the next month after the one you started on). The price per share on that day was $245, so you would receive approximately 1,020 shares ($250,000 / $245 per share) as part of your initial grant.
Some companies also use the concept of cliff, which specifies when the first portion of your initial grant will vest — e.g., both Microsoft & Amazon use 1-year cliff, which means that while both companies use quarterly vesting schedule, you’ll receive your first equity after one year with the company (so, 4 quarters worth of it, or 1/4 of the initial grant, assuming 4-year vesting period), after which the vesting will continue on a normal quarterly basis.
Next, at most (although not all) companies you will also receive annual equity refreshers (or just annual refreshers) as part of your performance cycle reviews.
In many ways, annual refreshers’ mechanics is quite similar to that of the initial grant: you get a certain $ value of equity, which then gets converted into shares on a certain date at that date’s price & then vests according to a pre-determined vesting schedule.
However, there are a few notable differences between annual refreshers & the initial equity grant, namely:
Annual refreshers are typically smaller than your initial equity grant (assuming you stay at the same level)
On average, you can expect those to be around 1/3 to 1/5 of the initial equity grant
Similar to annual bonus, annual refreshers typically consist of some base number, plus a performance multiplier
Annual refreshers almost always have a flat vesting schedule (e.g., 25% of your annual grant vests every year for 4 years) and usually don’t have a cliff
Vesting period for the annual refreshers is often similar to that of the equity refreshers, although there are exceptions (e.g., at Microsoft, annual refreshers vest over 5 years, while initial equity grant vests over 4 years)
The idea behind annual refreshers is two-fold:
To increase, or at least maintain, one’s compensation over time
To make sure that employees always have a sizable amount of unvested stock (both to create incentives to stay & to make employees invested in the long-term success of the company)
Let’s take a look at a quick example for how annual refreshers work, using the same L6 PM offer at Meta:
As we discussed, the initial grant for that hypothetical offer was $900k
The target annual refresher for L6 might be $200k — this would then be multiplied by a performance multiplier (let’s assume 1.0x for simplicity)
Vesting schedule for the annual refresher at Meta would be the same as for the initial grant
So, in this example, the annual equity compensation for each year (assuming share price remains constant) will look like this:
Year 1: $225k (initial equity grant of $900k / 4)
Year 2: $275k ($900k / 4 + $200k / 4)
Year 3: $325k ($900k / 4 + $200k / 4 + $200k / 4)
Year 4: $375k ($900k / 4 + $200k / 4 + $200k / 4 + $200k / 4)
Year 5: $200k ($200k / 4 + $200k / 4 + $200k / 4 + $200k / 4)
As you can see, in the example above, the annual equity compensation keeps growing every year (due to new annual refreshers getting granted every year), until year 5, when the initial grant runs out & so the annual equity compensation falls & stabilizes.
In reality, this drop in year 5 should be less pronounced, or non-existent, for multiple reasons:
Annual refreshers you get every year should increase over time (due to better performance and/or promotions to the next level)
Stock price should increase over time, making unvested portions of the older grants more valuable (remember, those are converted to a certain number of shares soon after they are granted, so if share price increases, that upside is captured by the employee)
Still, this is one of the reasons some companies (e.g., Google & Uber) decided to switch to front-loaded vesting schedule for the initial equity grant.
At those companies, instead of seeing increases in compensation every year until the initial grant runs out (and potentially facing a drop in compensation at that point), employees are supposed to see a steady compensation over the first few years — and then over time, grow that compensation via promotions and/or growth in stock prices (the opinions on front-loaded vesting are polarized — some people love it, but others hate it & believe it to be a ploy aimed to reduce the size of the initial grants).
Finally, at some companies, there are either no annual refreshers (Snap was one company that traditionally operated under this model), or annual refreshers are much lower than the value of initial stock grant (Microsoft at lower levels is a prime example of this). At those companies, to compensate for the eventual decrease in compensation due to the initial equity grant becoming fully vested, employees often rely on a combination of one-time refreshers and/or larger initial grants.
Note that unlike all the other components of one’s compensation (base salary, bonus, initial equity grant, etc.), annual refreshers are very rarely specified in the offer letters, and are instead decided every year by the company. At least for most of the ‘big tech’ companies, you can typically find at least some directional guidance on the size of annual refreshers online — however, there are no guarantees that those will stay the same in the future.
Calculating TC: examples
Now, let’s now bring it all together with an example — let’s say you received the following offer from Google for an L4 Data Scientist position:
Base salary: $155k
Target annual bonus: 15% of the base salary
Initial equity grant: $300k, with 4-year front-loaded vesting (33%/33%/22%/12%)
Sign-on bonus: $40k, paid over 2 years ($20k at the start of each year)
Let’s calculate what the total compensation will look like in year 1; in this case, the formula will be, assuming you get 1.0x multiple on annual bonus:
To recap, we got to $297.25k in total compensation for year 1 in this example.
Now, let’s take it further, and look at the subsequent years. After year 1, you’ll go through a performance review, and receive your first annual refresher. For L4 at Google, the target refresher should be around $70k (for simplicity, let’s again assume that you met expectations, and thus received 1.0x multiple on the refresher).
This refresher will start vesting in your 2nd year at 6.25% rate per quarter (unlike the initial grant, this refresher won’t be front-loaded, but rather would vest at the constant rate).
So, for years 2-5, your total compensation might look like this:
Here, we assume constant base salary & stock price. After your 2nd year, you no longer get a sign-on bonus (but the number of refreshers you received that are now vesting keeps growing). After your 4th year, your initial equity grants runs out, and instead you now receive a combination of a base salary, annual bonus & vested chunks of your equity refreshers for each of the previous 4 years.
Now, the numbers above are still an oversimplification of reality, in three key ways:
You should expect to get annual increases to your base salary, so, starting from your 2nd year, your base salary should grow
As you spend more time in a level, hopefully, you’ll start performing better over time, and thus will get higher annual bonus multiplier & larger refreshers
Lastly, the stock price should hopefully also keep increasing over time, which should affect the value of the unvested portions of your refreshers
Accounting for the above, the actual numbers for your 5th year might end up looking like this:
In the example above, total compensation for your 5th year consists of the following:
By your 5th year, there is no sign-on bonus or initial grant in the picture anymore
Your base salary is now $180k, after a few years of increases
You have portions of 4 refreshers vesting each year that might look like this:
Y1 refresher: originally $70k, but due to the increase in stock price, the remaining unvested portion has more than doubled in value ($150k * 0.25)
Y2 refresher: originally $85k, due to the increase in stock price, the portion vesting in Y5 is now worth $140k * 0.25
Y3 refresher: originally $100k, due to the increase in stock price, the portion vesting in Y5 is now worth $150k * 0.25
Y4 refresher: originally $140k, due to the increase in stock price (more modest the for the earlier refreshers, since it was granted only a year ago), the portion vesting in Y5 is now also worth $150k * 0.25
As you can see, in this case, your TC for your 5th year would be $365.3k.
This number above captures the idea behind ‘big tech’ total compensation well: the idea is to bring candidates at a healthy compensation, and then have them see their compensation gradually increase (or at least stay stable) through a combination of base salary hikes, stock price growth, larger refreshers & annual bonuses, and also an occasional promotion.
This way, in most scenarios, even after your sign-on bonuses and/or initial equity grant run out, your compensation shouldn’t dip. However, if it does decrease (for instance, due to steep stock price declines, as we saw happen with many tech companies in 2022), your employer might choose to compensate for this with additional one-time equity grants (that typically work exactly as annual refreshers, but are granted off-cycle to act as one-time retention vehicles for valuable employees).
One final thing to call out here is that the calculations above assume that your start date is aligned with the beginning of the financial year for the company. If you start mid-year, the calculations might be a bit different in two ways:
Your annual bonus for your first year will likely get prorated
Depending on your start date, you might not be eligible for an annual refresher at the end of the first financial year you spend with the company, and instead will start getting annual refreshers in your second year
Hopefully, the information & examples above will help you better understand how compensation at ‘big tech’ companies works, and will make it easier for you to make sense of your compensation, e.g., when you receive a new offer.
If you’d like to share your thoughts on this topic, feel free to post in the comments below, or reach out to me at me@alexstern.me!