A Potential Pay Raise in Start-Up Land

Despite the pandemic, new government rules on foreign tech workers may upend some traditional compensation plans.

It’s been part of Silicon Valley lore for years: join a start-up, preferably in someone’s garage, for low pay. Work long hours. Then, someday, strike it rich in stock options when the firm becomes the next Apple.

But like many Silicon Valley traditions, this model of compensation—starting out low in pay in hopes of striking it rich later—may be heading for a new chapter. A new US law that mandates higher base salaries for foreign tech talent on work visas could leave many start-ups with no choice but to pay all new hires more—with less payout at the end.

The changes, which took effect last month, are to the so-called H-1B visa program, raising the cash compensation for many non-executive tech positions to more than $100,000 and as much as $200,000. The goal of the increase is to encourage companies to hire US workers instead of less expensive foreign talent. But experts say the new rule is likely to raise base salaries across the board at a time when cash is superseding stock options as the preferred form of compensation for talent.

To be sure, the vast majority of start-up workers never receive large amounts of options, and those that do often end up losing rather than making money on them, says Esther Colwill, president of Korn Ferry’s Global Technology Industries practice. That’s particularly true amid the pandemic, when funding to start-ups has decreased dramatically, resulting in layoffs and closures. “There’s a lot more shakiness because of COVID,” says Colwill of the start-up environment.

Even before the pandemic, tech firms were moving to shorter-term cash incentives anyway—and that form of compensation is becoming more preferable for workers in computer programming, software development, web development, and other entry- and mid-level positions. For example, base salaries for entry-level computer programmers in Silicon Valley will increase by more than $30,000 to around $112,000, up from just under $80,000, according to US Labor Department data.

With options not as prevalent among that group of talent, new salary requirements under the H-1B visa program “changes the equation for them,” says Brian Reidy, a senior client partner in Korn Ferry’s Rewards and Benefits practice who specializes in tech compensation. “Those groups of talent will get a lift,” he says.

The new base salary requirements also change tech firms’ talent strategies. Many are already arguing, for instance, that they can’t afford the higher compensation levels and are shifting hiring and setting up offices in other, less expensive countries. Others are outsourcing functions to larger, more established tech firms, in the process giving them more control and power over innovation and talent.

Reidy says mandating higher base salaries could become so prohibitive that it could end up reducing jobs and leading firms to focus more on tech-based solutions for labor, which would particularly affect the entry- and mid-level talent the law is designed to help. Indeed, highly skilled, top-tier talent in high-demand areas like artificial intelligence, machine learning, robotics, and cybersecurity will still command top dollar. Start-up tech firms that need that kind of talent, says Reidy, are going to pay up for them at the expense of other talent rather than risk losing them to more established competitors that are also in those fields.

“As the overall cost structure increases, so does the funding requirements,” he says, adding that investors will provide more capital for top talent but not all talent. “The challenge is to raise the rates enough to be good for everyone while having minimal impact on the number of jobs available.”