Compensation Bands and Promotions

Income-maxxing has some unintuitive subtleties

I previously gave an overview of how to max out your compensation, which summarizes to: do something rare and valuable. Today I’ll talk more specifics about how promotions affect compensation.

Fireside True Story™ Time: I’ve never accepted a job due to compensation. Well, actually, I did once in college: living near Washington DC, there were things called “line services” where lobbyists could pay college kids to stand in lines outside government buildings in order to save them spots in public hearings. At a time when minimum wage was $4.25, each hour of standing in line was $19. It was some of the easiest money I’ve ever made.

But I’ve never accepted a job based on compensation as a key factor. When I started at Microsoft, it was the second lowest offer I received. I had loved my internship and knew I’d learn a lot by joining, so I did. Similarly, when I joined Facebook, I took a lower salary and less RSUs because I wanted a chance to update my skills at a time when Microsoft was still stuck in shipping boxed enterprise software every 3 years.

Just because I haven’t based career decisions on compensation doesn’t mean you can’t. I’m empirical proof, though, that compensation is often a natural side effect from building valuable skills.

Mid-Career Dominates Long-Term Compensation

I lead a seminar every year in University of Washington’s computer science program around career topics. Each year, understandably, seniors ask me a lot of questions as they mull over how to respond to job offers. Compensation differences between offers often cause them uncertainty.

My biggest suggestion to students contemplating different compensation packages is not to overthink them, because mid-career compensation far outweighs early-career compensation. If you want to be compensated well, the most productive thing you can do is build yourself into an amazing mid-career engineer.

This is the spiritual opposite of a child star going nowhere in their adult acting career. You’re like a child star when you get hired out of college: people haven’t seen much of you yet, but they think you have promise. By the time you become an adult, the best actors have been separated from many who never progressed beyond their childhood potential.

How dominant is mid-career compensation over early career? In my case:

• Started at Microsoft at $42k a year, with perhaps an additional $12k RSUs a year.

• Ten years in, went from L66 → L67, where base pay was around $150k with around $50k RSUs.

• Fifteen years in, my pay at Facebook was ~$250k with $1M RSUs. Note this is after taking a pay and RSU cut to join Facebook from Microsoft.

• Twenty-five years into my career, at age 48, my base pay at OpenAI was around $450k with $2M RSUs.

Several things might stand out:

1. The magnitude of difference in what you might earn in your 40’s is hugely different from your first job out of college. In looking at the numbers above, it’s clear that optimizing for maximal mid-career compensation is the wisest strategy while nearly disregarding early offers. Remember: Microsoft was my second lowest offer, but I took it believing it would build skills which would make me more valuable later — which it definitely did.

2. Companies compensate differently. OpenAI has a different comp philosophy from Microsoft. As a gross oversimplification, harder-to-get jobs tend to compensate more because they generate higher applicant demand. Getting yourself that harder-to-get job is all about what skills you’ve built earlier in career.

3. Your compensation growth will be lumpy. It’s more a punctuated equilibrium with large discontinuities than some sort of monotonically rising line graph. Expect years where nothing changes much. In fact, expect to sometimes take jobs offering less in order to invest in yourself. And if you work at startups, of course, pay cuts are a real thing. I’ve omitted experiences from the above timeline, like my three years starting a nonprofit where I was paid less than a tenth what I made the years before.

4. Compensation growth is geometric. Students in my seminar have a hard time intuiting that compensation in their 40’s will dwarf compensation in their 20’s because they don’t quite see that it grows geometrically. For instance, companies tend to increase pay by fixed percentages (e.g. “Everyone who gets promoted this year gets a 2% raise.”). Since those percentages apply on top of whatever your compensation happens to be, growth over time is geometric.

5. Some promotions have outsized consequences. Back when I worked at Microsoft, a promotion from L65 → L66 had a fixed percentage increase in RSUs, but going from L66 → L67 doubled your RSUs. There are similarly large discontinuities when going from L67 → L68 (“Partner” or E8). This tends to be because the market of qualified candidates is uneven between certain levels. At Microsoft, something like 1% of employees can be Partners; the discontinuity in pay reflects demand chasing much smaller pools of capable individuals.

6. Your mileage may vary. Compensation is ultimately aligned with how rare and valuable your skills are. I grew from an E3 to an E9, so my compensation changed very significantly between college and midlife. The average engineer progresses to E5 or E6 and stays at that level for the rest of their careers. Note, however, that even E6 compensation is dramatically higher than E3, so everything said here still applies.

The biggest thing you can do to increase your compensation is to focus on growing your skills — not negotiating your offers (which you still should) or choosing higher offers. The goal if you’re income-maxxing is to become the very best version of yourself by the time you’re 35-40 years old, which will be the prime years of much higher income if you’re in tech. So choose jobs and teams where your skills will grow the most.

Be Best

In Outliers, Malcolm Gladwell discusses the effect of birthdays on children becoming professional hockey players. Children born the right time of year end up bigger than their peers in children’s hockey leagues, so they perform better. And better performing children are given more opportunities where they further bloom. The advantage of being better than your peers compounds.

At most major tech companies, compensation bands at different levels overlap (a lot). So, for instance, an exceptional E4 often out-earns a below-average E5. Several reasons that compensation bands overlap so much:

• It gives companies the flexibility to hire individuals at equivalent levels without distorting companywide fairness. For instance, a staff engineer at Hooli might only be willing to go to Vandelay Industries if they can stay a staff engineer. Yet their performance during the interviews relative to Vandelay’s staff engineers was not crushingly terrible, but definitely below par. In this case, Vandelay can make an offer with a Staff title but compensate at the lower end of that level in order to keep compensation fair relative to others in the company.

• It gives room for rewarding exceptional performance without requiring promotions. Companies can give an E4 a meaningful pay bump even if they aren’t quite performing at E5 yet. Conversely, and perhaps equally importantly, poor performers’ compensation can drift to below average as overall compensation bands are increased over the years (i.e. by not giving a below-average IC4 a raise while the overall IC4 compensation increases, that IC4 naturally gets paid commensurate to their sub-par contributions over time).

Knowing that compensation bands overlap a lot leads to a consequence many people don’t internalize: it is often better, compensation-wise, to consistently exceed the expectations of your level than it is to just meet the expectations of your level.

Concretely: Bob and Sally start their careers in the same company at the same time. They grow equally fast in skills over the years. Bob constantly pesters his boss to promote him as soon as possible. He goes from E3 → E5 in the space of 4 years, but has rarely exceeded the expectations of his level since he always gets promoted as soon as he’s performing on-expectations at the next level. Sally works on the same team as Bob, but her manager only promotes her when he feels she’s greatly exceeding the expectations of her level. Sally goes from E3 → E5 in 6 years, even though she had the same skills as Bob along the way. The main difference between them is that Bob’s promotions happened a bit before he was fully ready while Sally’s happened a bit after.

While Sally gets to E5 more slowly, she has exceeded expectations in every performance review along the way. Whereas Bob mostly met the expectations of his level except for the two times leading to promotion. In most tech companies, Sally would have earned more (sometimes much more) than Bob even though she reached E5 later because her performance was always stronger than her peers. Most companies give outsized rewards to people who greatly exceed the expectations of their level; for many years at Microsoft, merely meeting expectations would lead to no bonus and no raise — you were essentially “doing your job.”

There’s a subtler long-term benefit to only being promoted when you’re fully ready to excel in the next level: you tend to be given the best opportunities for growth. Managers tend to remember outperformers and give them first dibs on new projects. When asked whether you’d give an attractive project to someone who’s always delivered beyond expectations or to someone who’s never done so, managers understandably tend to bias toward those who’ve always done a great job. This exposure to better opportunities compounds over the course of a career, leading to far more meaningful compensation differences in the long run.

I once sensed I was about to go from L64 → L65 at Microsoft and asked my manager to only promote me once he felt I was going to do well relative to peers at L65. Saying this delayed my promotion by six months, but it was well worth it to continue a history of overdelivering rather than to arrive at a new level early and struggle to tread water.

I’m not suggesting that everyone redshirt themselves and deliberately slow-play well-deserved promotions. I’m instead arguing two things:

• Focus on building the skills that will make you great mid-career. Building these skills happens largely independently of when you get which promotions.

• Realize you’ll usually earn more by consistently delivering beyond expectations at a lower level rather than always barely meeting expectations at a higher level.