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Comment by sonnyblarney | Hacker News Reader

Pay raises that rise faster than inflation are unsustainable, rather, you're pointing at a specific asymmetry between the BigCos and startups in the Bay, which is definitely causing strain.

Outside the Valley and specific centres, this isn't quite so much an issue.

Inside, it's an intractable problem ...

Though your point might be valid from the Dev's perspective, consider the other side for a moment and you see how tough it is - i.e. to have the expectations of ever increasing normalized outflows.

So we need to look at this kind of objectively (i.e. not from just Exec/Dev perspective) to figure out how to deal with the situation.

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Pay raises that rise faster than inflation are sustainable as long as revenue — or at least expectations of future revenue — are also rising at a similar rate. It's not at all an intractable problem. If that situation doesn't exist then you're not managing a start-up, you have something else such as a value business, small business, or lifestyle business.

But at the same time if you're just building iOS apps then it would seem foolish to locate the majority of the engineering team in Silicon Valley. There are plenty of talented iOS developers all over the world now in lower cost areas.

>Pay raises that rise faster than inflation are sustainable as long as revenue — or at least expectations of future revenue — are also rising at a similar rate.

You're assuming that revenue is decoupled from payroll costs.. in which case why should increased revenue lead to a pay raise?

In reality, an increase in revenue is supported by increased labor costs/manhours.

The whole point of start-up businesses is to make them scalable by finding ways to decouple revenue from labor costs. If you can't figure out a way to do that then you don't have a real start-up, you have some other kind of business and will have to apply other compensation approaches.

If that's the case, then why does a company like Google or Groupon go from 2 co-founders to 5,000+ developers once they get funding and start to scale?

And (to repeat myself), if revenue is uncorrelated to labor, then why should the labor get a proportional piece of it?

I think you're missing the point. As companies grow they tend to expand into other lines of business, which obviously requires additional resources. But if a software business is structured properly then revenue will trend upward at a rate which increasing diverges from labor costs. That's literally the whole point of automation. Draw a chart of revenue per employee for Google from when they were founded until now.

Labor isn't necessarily entitled to any particular share of revenue. Employees get whatever they can negotiate based on market rates at the time. And those rates are based far more on local area and industry demand than on the current revenue at any single company.

Labor doesn’t get a proportional piece of it, and nradov didn’t say it does. From my reading, nradov just said increases in pay above the norm are sustainable if revenue is also increasing at a rate above norm.

It's definitely an 'intractable problem'.

A) The issue is specifically pay rates at 'BigCos' are rising quickly, making it harder and harder for startups to keep up. This is 'intractable' to the point where many simply stay away from the Valley, which was less the case before.

B) Companies with lofty margin increases over time are extremely rare and such inside wage inflation is totally unsustainable over any period - forget business cycles. Only at a rising Google, or the very rare lucky startup growing the customers is this not a problem. Very, very rare. And it creates the 'A' problem above for other companies.

I don't see anything intractable. There is abundant investment funding available to pay employee compensation at start-ups with the potential to scale up with increasing profit margins. That just means founders will have to recalibrate their expectations on early stage valuation.

On the other hand, for businesses without the potential for high margins it never made sense to locate in high cost areas. There are plenty of other suitable areas. For example Cleveland would be an excellent location for a health IT business. The tech industry as a whole would be healthier with more geographic diversity.

"There is abundant investment funding available to pay employee compensation at start-ups with the potential to scale up with increasing profit margins."

No, there is not an abundance of capital floating around to just pay developers ever increasing (above inflation) salaries commensurate with the massive profitability of other major companies in their immediate vicinity.

To the point wherein even Peter Thiel wants to opt for LA, with his statement: "I'm spending all of my money on Silicon Valley landlords"

They're only unsustainable if the employee's productivity is stagnant. If one year of experience increases an employee's productivity then you can more than happily increase their pay by greater than inflation.

"Pay raises that rise faster than inflation are unsustainable"

What?

How does your statement hold up if a startup is starting to make a lot of money and revenue is increasing by 20 to 50% a year?

Because that growth is not sustainable in the majority of cases. Sure, there are exceptions, but I bet you're not going to be eagerly handing the org money back once growth flattens out.

In very rare cases do startups have that kind of growth and in many of them their unit costs are bad and they are making less and less money. In the few cases wherein sales are growing, AND they are more profitable, AND it wouldn't make more sense to put the money elsewhere - then yes - fat wage increases are possible, for a short period. In almost no companies is this reasonably sustainable.

Man, as a capitalist it really sucks when the free market is working against you, doesn't it? For years there, supply was way below demand and employers got really comfortable treating employees as trivially replaceable cogs with no bargaining power.

If you can't pay your devs a competitive salary, they'll leave. Bummer.

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