Why do tech companies pay their employees so much money? #SmallBiz

BruceDayne 1:13 AM Jason Lemkin Khareem Sudlow, Small Business,

#SmallBusiness

Historically, there has been 1 good solid reason to pay top employees at software companies a lot: leverage.

Historically, a very small but mighty team could build a piece of software — say even just a team of 10–20 — and with a lot of hard work, and quite a bit of lucky, many millions could buy it.

If once piece of software can sell $10m, $50m, $100m+ a year … and you only need a handful of engineers to build and ship it and distribute it … the truth is, it doesn’t matter too much, within limits, how much you pay that tiny number of employees.

Typically, you’d see classic software companies able to deliver $2m+ of revenue for each employee. If you have metrics like that, leverage like that … you can pay well if you want to.

Companies like Microsoft and Google were insanely profitable when they IPO’d for this reason. As are some newer ones like Atlassian and Mailchimp.

Of course, things are a bit different today. With so much more capital available, now high salaries are often just a function of competition. And are often paid in start-ups that require huge, inefficient teams. Uber and WeWork don’t have anything like the efficiency of Microsoft or Google. Nor really do even most SaaS companies, with vast sales and marketing teams.

So today — competition is why tech compensation is always. Maybe taht was always true.

But with outliers, and with hyper-efficient teams — it doesn’t matter. Paying up for the best, when you only need a relatively small team, is a small investment with high return.