Save 15% or more by switching equity guidelines to geo tiers

Most tech companies have historically managed refresh grants with a national US guideline, but that has changed dramatically. Compa’s summer flash poll showed that the vast majority of leading tech companies have two or more equity ranges. When I talk with comp leaders about why they shifted equity to geo tiers, the answer is always the same: reduce spend while minimizing competitive impact.

Why is adopting US geo tiers such a popular lever to pull? Because it does exactly that. But it calls into question your comp philosophy.

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Save 15% by switching to geo tiers

Suppose you currently pay refresh grants at the 50th percentile of top-tier markets like SF and NYC. Your ranges might look something like this for individual contributor engineer 4-year refresh grants:

Now, let’s divide the US into three tiers. This is where you have tough decisions about which cities go into which tier (more on that below).

So how much did we save? It depends on your employee distribution by level and geo tier. Here’s an example of a company with 3,000 engineers:

And finally, your before/after in annual spending: a 15% reduction in savings.

Of course, this is just an example — your savings depend on many things. The takeaway is that spending reductions of this magnitude can be achieved with minimal impact on competitiveness.

How to expand this analysis

The math in this example is, of course, over-simplistic. If you plan to build a model for your company, here are a few points of consideration to make it more robust:

• Localize the market analysis down to the job. This assumes only engineering, and is not specific to different engineering jobs, which have material differences in market rates. Expand your market analysis, guidelines, and employee demographics to all areas.
• Factor in participation. Eligibility/participation impacts savings. For example, if you have 70% eligibility at P3, your largest employee population, you’ll get proportionally less savings at that level in switching to geo tiers.
• City placement in tiers. Your realized savings are a function of your discipline to stick to the facts versus leadership preferences. If you have a large office in Boston and end up grouping Boston with SF and NYC, you won’t realize as much reduction in spending.

Also, to state the obvious, geo tiers represent one lever. You likely need to pull many to achieve your goals, including:

• Vesting: Shorter vest schedules or front-loaded schedules (mind the pitfalls, though)
• Eligibility/participation: Guiding managers to only provide refresh grants to X% of employees, such as by level or based on performance
• ESPP: Shift equity spending from incentives to benefits by introducing our improving your ESPP program

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Are we still competitive?

This lever is popular because refresh grants are still competitive in each market. You can analyze this by looking at the implied market percentile in each metro before and after. Let’s look at the example of Austin, Texas:

Our old guidelines were “overpaying” in the Austin market. Interestingly, they weren’t overpaying when most companies had a national guideline, but prices have come down as more companies have introduced tiers. You can see this shift in Compa trend data based on offers:

Geo tiers effectively eliminate the cross-subsidy by metro area, i.e., you can have your cake and eat it too. Of course, making this change hinges on a philosophical shift.

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Changing your philosophy

Why offer stock-based compensation? Here are a few of the many reasons you might:

1. Everyone participates in wealth creation
2. Spend less cash (i.e. maximize non-GAAP)
3. Attract the best talent
4. Align long-term incentives to shareholders
5. Retain talent with unvested value

Shifting equity to geo tiers primarily relates to #1: everyone participates in wealth creation. Most companies had geo tiers for cash and a national range for stock. The idea was that cash comp generally aligns with the cost of labor in each market, which, barring some important exceptions, generally aligns with the cost of living.

On the other hand, stock comp had nothing to do with where you live and everything to do with your role in growing the company’s enterprise value. Introducing equity geo tiers aligns stock comp more closely with cash comp. If you are a mature public tech company, your employees see it this way, too.

Notably, this trend is the exact opposite of the remote work trend a couple of years ago, when some companies experimented with eliminating geo tiers for cash and stock altogether. It took just one small market correction to reverse that expensive trend.

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Curious about equity trends for AI/ML roles in tech? Tune in to my conversation with Terry Adamson, Partner at Infinite Equity. We explore emerging challenges in attracting top talent and discuss strategies for determining optimal equity pool sizes.