Hire the Most Expensive Engineers You Can Find

Why those who cost the most are the best bargain, and how to recruit them

A disagreement about employee compensation almost killed the sale of Collage.com to private equity back in 2021.

A top employee wanted a raise.

But, the buyer was concerned because he was already being paid above the 90th percentile for his job role.

However, he was a 99th percentile employee, not a 90th percentile employee. We knew that he could get a job at Google for the salary he was requesting.

Moreover, having a top person leave because we refused to pay him top-of-market right after selling to private equity could trigger an exodus of other top-of-market people.

When we finally “won” this argument, someone on their side commented to my business partner “I’m glad we could work this out, I know you really like him.”

Well, if you ever want to offend a labor economist (like my former partner), imply that they make compensation decisions based on personal relationships.

They essentially gave in to get the deal done even though they disagreed with our position and assumed we were doling out favors like the mafia rather than trying to run a rational business.

Top talent is a lemon market

Our story wasn’t actually that bad. The PE firm went through with the deal and didn’t try to cut any salaries – just block one raise.

Other buyout firms like Vista are notorious for aggressively driving down engineering salaries (someone I know was being forced to keep the average salary below $90k annually!)

When I first heard this, I thought it was crazy.

After thinking more about my experience, however, it starts to make sense.

The fundamental issue in our disagreement while selling Collage.com wasn’t that the PE firm believed top-of-market employees are overpaid generally, but that they had no way of validating our assessment that a particular person was top-of-market.

In short, there was information asymmetry. Just like a mechanic trying to sell a used car that’s actually good in a lemon market, the buyer has less knowledge and can’t be sure whether that’s true, so they don’t want to pay top price.

The people who run Vista have been successful and are surely savvy enough not to believe Google overpays their top engineers.

When they’re dealing with random small companies, however, they can’t know whether engineers with top-of-market salaries are actually top-of-market talent, or whether the founders are just overpaying buddies of theirs who could never get a job at Google.

It’s easy to see how true 99th percentile employees lose out.

The technical assessment chicken-and-egg problem

The lemon market issue for top talent extends more generally, not just at PE-owned firms.

Evaluating technical skills at the high end is very difficult. To do it independently (i.e., not just hiring someone who worked at another company with good evaluations), you need someone who has those skills or close to them to structure the evaluation.

This creates a chicken-and-egg problem because the CEO or CFO (who are rarely technical) need to have confidence that the engineering leader can do the evaluation or identify someone who can if they are to approve top-rate salaries.

I can attest after talking to many VP of engineering candidates with nice-looking resumes that many of them aren’t up to the task, and CEOs are right to be skeptical.

Another approach is to just hire people who passed technical evaluations at other reputable companies.

This can work, but it’s more expensive and risky than evaluating people yourself. There are fewer people who have worked at places like FAANG companies than the broader population, so they’ll cost more. Also, big companies make mistakes and have a range of performers too. Without your own evaluation, you’re liable to end up with the lowest performers who cleared the bar elsewhere, which puts you partially back in the lemon market situation.

Ultimately, the difficulty of independently differentiating between someone who could be a staff engineer vs. a principal engineer at Google leads to widespread information asymmetry at the high end of the market, especially for people who don’t want to work at big-name companies with widely reputable technical assessment practices.

Following lemon market theory, this drives down prices for hiring top talent.

It’s hard to measure the financial impact of engineering

An article from the economic policy institute about CEO pay shows that it has risen 1,322% since 1978.

You may be wondering: why 1978? Well, in the early 80s, there was a run-up of CEO salaries based on analysis of their impact on stock price and a shift to stock-based compensation. Essentially, people started paying CEOs based on their estimated share price impact.

Some CEOs might be overpaid, but certainly some of them do produce massively more value than an average worker (for example, Steve Jobs, Elon Musk).

It’s unlikely that a top engineer can add as much value as a top CEO, but with the extremely high leverage of software, the impact can still be large. Top companies like Google have recognized this. According to levels.fyi, Google pays distinguished engineers $2.6M. 

However, it’s a lot harder to directly tie engineering contributions to business results than those of a CEO, and most companies probably aren’t as good at it as Google.

At lower senior levels like staff and principal engineer, it is even more difficult because there are fewer big patents or innovations directly linking specific people to revenue.

Ultimately, companies aren’t going to pay people more than they believe that they will add to the bottom line, which is difficult to demonstrate for individual top engineers, even if it’s true. 

The high-salary political factor

The CEO compensation article in the last section goes on to mention: “Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with.”

People who add above-average value for companies have to fight against tremendous political pressure if they want to earn a commensurate amount of that value.

At a local level, it’s awkward for someone to make 13 times more than their colleagues (levels.fyi shows $204k for an entry-level engineering salary at Google, 1/13 of the $2.6M for distinguished engineers).

Also, to get paid more, you have to want to fight for it. This is just a hunch based on my personal experience, but of the people I know, engineers tend to be more egalitarian than CEOs. I wouldn’t be surprised if engineers are generally less aggressive in pursuing higher salaries than CEOs.

On top of the lemon market issues, it’s important to consider that top engineers may be further underpaid due to broad political sentiment, as well as their own personal beliefs.

The first catch: identifying top talent

So far we’ve focused on the factors that make top engineers the most underpaid. The obvious conclusion is that if you can find one and convince them to work for you, you should hire them.

The first catch, however, is that “if.”

The driving force of lemon markets is information asymmetry. To actually realize a bargain, you need to break that asymmetry and differentiate people who are actually good from people who just look good.

There’s no magic solution here and it is an extremely difficult problem with too much nuance to cover here in depth, but there are a few things specific to engineering you can do to increase your chances.

Make engineers do engineering

An engineer’s job is to do engineering, not talk about doing engineering.

I was surprised to encounter this at first, but some people who are great at talking about engineering can’t actually do it to save their lives and fail basic coding exercises.

On the other hand, mediocre candidates can quickly get good at solving leet-code style interviewing questions. So just giving out algorithm and data structure problems on a whiteboard can lead you to passing over people who would do a good job or worse: lead you to hiring people who can’t actually do the job at all.

You should have a brief (2-3 hour) technical assignment as part of any engineering hiring process, and the assignment should reflect real work as closely as possible. Why 2-3 hours? I have found that you can learn a lot about a person’s abilities from a problem that can be solved in this amount of time. It is a commitment that most (but certainly not all) candidates can make to an interview process about which they are serious.

This means working with existing code, debugging, writing tests, and clarifying ambiguous requirements. For more senior engineers, this means drafting and reviewing architectural plans.

Penalize people who are charismatic

Doing a technical assignment can help you be more objective, but I have found the most challenging thing about hiring to be overcoming the immense bias people have to favor those they like.

Of course, if a candidate presents as untrustworthy, dishonest, is a very poor communicator, or for some other appropriate reason would be a negative addition to your team, you should stop the interview process.

But, if someone is unassuming and not very animated or exciting, you should get excited!

You may wonder, if someone is good at selling, isn’t that a positive thing? All else being equal, yes. They will be able to better communicate internally and get things done.

However, if they are better at selling, then there is a much higher risk that interviewers will assess their skill set to be better than it actually is, especially if the candidate takes credit for accomplishments that were a team effort.

As if that isn’t bad enough, previous interviewers at other companies are more likely to have over-assessed the candidate, so the reliability of signals from prior resume experience is also much lower.

Actually putting this adjustment into practice is difficult. You need someone to play devil’s advocate in the hiring process and question the judgment of other interviewers.

One thing that can make it easier is to instead give a bonus to unassuming “diamond in the rough” candidates who you think interview below their ability level. This makes the conversation more positive and less contentious (“we should give this person a chance” vs. “the person you like is actually unqualified”).

Beware of people who only care about money

With the market for top engineers being underpriced, one way candidates level the playing field is by seeking other non-monetary benefits.

The best people tend to be very particular about their working environment and value things like low bureaucracy, low politics, low technical debt, the ability to have a direct impact on customers, talented colleagues, and supportive management.

This isn’t foolproof of course, but you should take it as a negative signal if candidates are not heavily focused on quality of their working environment and talent of peers, because this may mean they are not top-of-market and don’t have the luxury of worrying about these intangibles.

The second catch: convincing top talent to work for you

One of the biggest things that gets in the way of successful engineering hiring is management ego.

If you want to succeed at bringing in top-of-market candidates, it’s important for everyone in management to understand that by working for you at the prevailing salary, candidates are doing you an incredible financial favor. Engineers aren’t being “divas” or “snobs” – they’re merely trying to recoup some of the value they create in the form of enjoyment and career development.

You’re also up against Google, Microsoft, and others who invest heavily in employee experience, so you need to find an edge that big tech companies can’t offer.

For the people I’ve been lucky enough to hire at my companies, the thing I have been able to offer them that Google can’t is direct access to top management and real influence on the direction of the company.

If a talented engineer believes that fixing a major piece of tech debt is worth it, let them do it without a complicated approval process. (Though, of course, you should ask them for a plan.)

If you’re talking to investors and considering whether to raise an equity round, discuss it one-on-one with individual engineers. Teach them about the nuances of finance and ask for their opinion.

If you want to land a top engineer, the CEO should speak with them during the interview process to understand what they value beyond money, and personally guarantee that they’ll get it with the full support of management.

Conclusion

Bending over backwards to recruit top engineers and pay them top-of-market may seem counterintuitive, particularly for small businesses concerned with efficiency.

This has been my strategy while bootstrapping two start-ups, and it’s worked very well. Top people get so much more done with high quality and less management overhead, plus their insight drastically improves decision making at top levels of the company. 

As a final parting thought, when something feels counterintuitive, that means it is counterintuitive for others too, and may just be a great opportunity.