The High Wage Disincentive Paradox

The High Wage Disincentive Paradox

When I finished my U.S program, I joined a leading technology firm which plays at the heart of building electronic components used in practically any major electronic product in the world. In the specialty high-performing converter business, it commands more than 75% of the global market share. They awarded me stock options which appreciate in value as the stock price of the company does well in the market.  To illustrate: if a company awards you a stock option when the company stock is at $4, and the stock rises to $10, you have made $6 for yourself, if you sell at that $10 mark. You can only sell after the award has vested.

An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.

Vesting  “is the process by which an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan”. Simply, it is an agreed timeframe you must wait before exercising the rights to sell the awarded stock.

For employees, the desire is for the stock to go high since your gain is the difference between the stock price position on award date, and the day you exercise your right to sell it.

So, for me, the prayer was for the stock to keep rising. It was a natural feeling because the Great Recession had battered the stock market and everyone was seeing the stock improvement as a moment of glory.

But somehow, I heard a sobering message from a Vice President in the company: he was worried that if the stock continues to improve, he will have empty seats to do the works. He explained that before the dotcom crash in late 1990s and early 2000s, people made so much money that they have no need to remain as employees. Then, he noted, the challenge was managing the exodus of staff who sold stock options and left.

In other words, they made money as stock prices accelerated, and companies could not keep them as staff. For companies, then, the problem was finding people to do the company works because men and women were resigning. The staff have made all the money they needed to retire early. So, when the stock price was rising, the management was worried that some of the top designers would leave. Typically, stock options are awarded to designers and top-performing technical members as incentives for them to innovate for the firm.

The AI Race and Wage Inflation

According to a recent piece in the New York Times, AI engineers are making tons of money. As companies compete for talent in computer vision, self-driving, AI engineers are arguably the best paid in the world today, notes Fintech Collective in a newsletter. Bachelor degree graduates of Carnegie Mellon University in the self-driving category begin with about $200,000 yearly. The top PhD graduates now command in the region of $500,000. Veteran AI experts are now paid on the same formats as athletes and actors with defined contracts and not the typical “as it is” or “at will” contract.

The NYT recently interviewed employees of the big tech companies on an anonymous basis, discovering that A.I.-focused PhD’s and employees “with just a few years of experience” can earn $300k – $500k in salary and equity compensation. Well-known A.I. experts are often paid millions and negotiate their compensation like professional athletes. And in a court filing earlier this year, Google revealed that the former leader of its self-driving division (now with Uber, the subject of a high-profile lawsuit) received over $120 million before departing the company.

The Paradox

As I have noted already, when you pay these elite engineers, they suddenly make so much money that the desire to work ends. Then quickly, they leave the doors and your business could be imperiled.

Early staffers had an unusual compensation system that awarded supersized payouts based on the project’s value. By late 2015, the numbers were so big that several veteran members didn’t need the job security anymore, making them more open to other opportunities, according to people familiar with the situation. Two people called it “F-you money.”

So companies like Google learnt a hard lesson: too much incentive could backfire by removing the needs to work. As Bloomberg noted, most of the early engineers that worked in Google self-driving car project, just packed the money and left, when the stocks vested. They have minimal incentives to keep working.

Yet, for business leaders, this is a tough call. If you do not pay, they will not come, and if they do not come, your competitors will hire them, and with AI at the center of modern technology race, you will not likely win in your sector. So what do you do? You pay along, and the party continues.

All Together

Africa is many years away from this type of problem.  We are yet to get in the real game of building these great pioneering technologies. But one day, it will happen. But largely, the AI wage inflation and the humans that make money and quit, will be exciting cases for research, in human psychology and employee compensation in coming years.


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