Life of Luxury

Perks.  Employees at tech companies have it so good.  Google employees get high quality food for breakfast, lunch and dinner.  Virgin, LinkedIn and Netflix employees get unlimited vacation.  Buffer employees get retreats in amazing places.  Employees at Treehouse – an education company based in Portland – have 4-day workweeks.

Why do software industry employees get such lavish perks?

Cynics say that Google is tricking employees to work longer hours.  And that LinkedIn, Virgin and Netflix employees are worked so hard that they never actually take vacation.  Those things may happen, but they’re not the reason these perks exist.  To understand what’s going on here, you need to understand the operating expenses for software companies.

Operating Costs At Buffer

Social media management app Buffer recently released their Transparent Pricing update for 2016.  The update lets you know how every penny of your Buffer subscription is spent.  Buffer have a commitment to internal and external transparency (see our article How To Create A Culture Of Transparency). This data gives us great insight into how their budget composition has changed year-on-year.


Change YOY

Advertising & Marketing -0.66%
Computer and Equipment 1.08%
Employee Benefits -0.11%
Fees to Stripe -0.11%
Insurance -0.53%
Legal and Accounting -0.70%
Meetups and Travel -1.91%
Other 0.10%
Rent -0.47%
Servers 1.48%
Team Member Salaries 3.29%
Telephone & Internet -0.08%
The Tools We Use -1.29%

Notice anything?  There are three areas which have consumed more of the budget in 2016 than 2015.  Computers / equipment, servers and salaries.  What’s interesting is how much more of their budget is consumed by employee salaries.  3.29% more in 2016!  More than double the increase of anything else.  In absolute terms, salaries went from 65.6% of their budget to 68.9%.  This matches my experience building software teams.  My teams have operated between 50% to 60% of my budget.

Source : Buffer 2016 Open Pricing Update
perks labor intensive industry Reflective Management

Software Is Labor Intensive

Software companies pay a disproportionately high percentage of operating expenses to salaries.  Compare 65% of operating expenses at Buffer to 22% at oil, gas and manufacturing companies*.  Or 18% in retail and wholesale.  Oil, gas, manufacturing and retail carry significant infrastructure costs.  that software companies do not.  Software companies don’t have to buy oil rigs or operate factories.  Software isn’t the only labor intensive industry.  Health care services (52%), services (50%) and education (50%) all pay a significant percentage of operating costs to salaries with one important difference.  Software people generally command much better salaries.

Why do software people get paid more than educators or health care professionals?  Simple.  Scale.  One developer can write code that serves millions of customers.  An educator can only be in front of one class at the time.  Of course, you could teach a bigger class but then the quality of education drops when you do.  Even entry level employees in software are well paid.  When I took my first dev job in the 90s I was paid 18,000 UKP.  That was 25% more than the UK average wage across all age groups.  It was 300% more than most 21 year olds were earning.  These days you’d be hard pressed to find a college grad with a computer science degree willing to work for less than $100,000.

Source : SHRM Research

It’s About Happiness

So why all the perks for people who are already well paid?  They say money can’t buy you happiness.  Nobel Prize winning economist Angus Deaton agrees.  His 2010 study showed diminishing returns in day-to-day happiness when people earn more than $75,000 per year (in the US).  Most software employees already earn more than $75,000.  Where monetary rewards like raises and bonuses have diminishing returns to motivate already well paid employees.
Perks that make life easier and more comfortable have significant emotional value.

Source : What the New Nobel Prize Winner Has to Say About Money and Happiness.

Time Magazine

Last week, I wrote about perks and treats I’ve given my teams over the years.  I made the argument that perks are fairly cheap as a %age of salary.  The general formula is :
Perk Index = (Cost of providing perk to whole team / cost of salaries) * 100
Where “cost of providing perk to whole team” is bounded by likely usage.  For example, while I had an unlimited book budget, in reality we only ordered a handful of books per month.

Related : Inexpensive Ways To Show Employees You Care

Reflective Management

Pick Your Perks

Let’s say you can find 3 perks with a perk index of about 1.  You’re spending about $4,500 per year engineer earning $150k.  Does that make a difference financially?  Somewhat.  However, in a highly competitive labor market you’re competing for the hearts and minds of employees, not their wallet.  For example, I worked in an office with a deck that looked out over the ocean.  That deck landed me a handful of new hires that were being offered more money by more prestigious companies because … it was cool.
Think about this conversation between a recruiter and a potential employee.

“Come work at AcmeCorp. We pay 3% more than our competitors”


“Come work at AcmeCorp. We have a private bus that runs to your neighborhood, a daycare for your kids and free gourmet food 3 meals-a-day if you want it.”

Easy choice, isn’t it?

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