Google’s Eric Schmidt must have watched a few late-night infomercials before dashing off a memo to his employees last fall. The memo, which might as well have been advertising a new gizmo called StayPlease, gave workers at all levels of the company a 10% raise. But wait, there's more! Google would be permanently transforming a portion of the employees' annual bonuses into their base salary. Identify yourself as a Googler when you call the toll-free number (888-PLZ-STAY), and Schmidt would also give everyone an extra $1,000 bonus — tax free! He closed his pitch by thanking people for making Google "a place where magic happens," but it wouldn't have been a surprise if he'd thrown in his latest amazing discovery, the FacebookEraser (a $50 billion value).
Schmidt's seeming desperation stems from a number of high-profile defections to Facebook: Matthew Papakipos, head of its Chrome OS team, and Lars Rasmussen, a cocreator of Google Wave, to name two. Although Silicon Valley's official unemployment rate hovers around 11%, which is higher than the national average, those grim numbers don't apply to top engineering talent. Four companies in particular — Facebook, Google, Twitter, and Zynga — have been waging a fierce battle for their services. Tech blogs abound with tales of six-figure — and even seven-figure — offers and counteroffers for the best software minds.
But these tales of high-rolling nerds mask a greater truth, one that actually threatens to hurt the tech industry over the long term: Software engineers in the Bay Area are underpaid when you consider the billions in wealth their work creates. In interviews with several engineers — and after scanning the boards on Glassdoor.com, which lets people post anonymous salary info for all to see — I found that a programmer with a few years of experience can expect to make somewhere between $100,000 and $150,000 a year at one of the Valley's powerhouse companies. In most parts of the country, that is a great salary. But in Silicon Valley, 13% of households make more than $200,000 a year, and single-family homes frequently sell for more than $1 million. An engineer in San Francisco told me that he could never dream of buying a house in the city on his pay; another said that it would be impossible to pay off his student loans anytime soon. Compare their salaries to those of the lawyers, doctors, bankers, consultants, VCs, and other professionals who populate the neighborhood.
If the big tech companies were smart, they would begin to reverse this era of underpaying their most valuable employees. For one thing, it's draining the talent pool because the comparatively middling salaries push smart people toward other careers. "The cream of my computer-science students don't become engineers; they go to Wall Street or become management consultants," says Vivek Wadhwa, a professor at the Pratt School of Engineering at Duke University. A decade out of college, a consultant could be earning nearly a million dollars a year, while an investment banker could make many millions, he says.
The current salary level for programmers also promotes a gambler's view of work, which hurts established companies' long-term stability. People often leave steady jobs at companies with lots of resources in order to join startups that hold the promise of an acquisition jackpot. Several young engineers said that this was, in fact, their life plan. "I'm a little young for a retirement plan," one 22-year-old engineer told me, "but to be honest, I have to say that I count on that happening in my lifetime." Living in Silicon Valley without making a bundle in an IPO or acquisition just doesn't seem possible.
Of course, this situation benefits pre-IPO companies like Facebook and Twitter. Still, that's only in the short run. Before long, they too will see workers fleeing for the next great pre-IPO darling. Less-noble startups aren't above taking advantage of programmers' stock-option dreams, either. "They use the excuse of 'We don't have much money, and you'll be getting stock' to be really stingy with pay," one engineer told me. Need-less to say, the vast majority of these startups fail, leaving their workers in the lurch.
The Valley's tech giants aren't hurting for money. Google alone has more than $33 billion in cash. That suggests an obvious way to stem the tide toward Facebook, Twitter, and tomorrow's buzzed-about startup. Eric Schmidt should open up his checkbook even further. Operators are standing by.
A version of this article appeared in the March 2011 issue of Fast Company magazine.