As an early stage tech investor with limited capital to deploy, I pay close attention to the market for technical talent. Cash burn per technical headcount, especially for young startups that have no or limited revenue, is one of the most important factors in determining how many months or “runway” a company has before it has to raise more capital, or more likely, shutter its doors. For those who can break through the language and cultural barriers, China used to be touted as a place for “cheap talent,” and I wanted to see just how much that remained the case in 2015. As it turns out, while China remains much cheaper than Silicon Valley at the junior levels, it is no longer (and hasn’t been for quite a few years), the low price leader for technical talent overall. In fact, even at the middle levels, compensation in China can now be on par with that in the Valley, at least on a before-tax cash basis.
What the Data Says
For data, I looked to Norman Chang and his excellent team at headhunting firm PCI Executive Search China, and here is what they came up with. In an effort to use the most complete dataset available and to compare like with like as much as possible, Chang restricted his search to technology companies with more than 1000 employees, which are mostly based in first-tier cities such as Beijing, Shanghai and Shenzhen, and only takes into account before-tax cash compensation, as non-cash benefits vary widely. Also, in order to capture purely technical positions, only candidates with graduate degrees in engineering related disciplines are included. Here, “China” refers to locally owned firms as opposed to MNCs, or foreign multinational corporations with local Chinese operations.
The data surprised me – while for junior engineers China looks to be about on average a little more than half as expensive on a cash basis as Silicon Valley, that difference vanishes at the director level (typically a dozen years of experience or more) and above. At the junior level, I did a quick search on one of the most popular Chinese websites for Internet jobs, Lagou, just to confirm. Sure enough, a junior Python engineer in Beijing (with just 1-3 years experience) can expect to make at least 15K RMB ($2400 USD), or around $30K in annualized base salary and up to 35K RMB ($5600 USD) or $68K, for a large, well-funded company (such as Meituan). This is not including stock options, additional cash or non-cash bonuses, or other benefits. A similar job ad would be $85K-$125K in San Francisco as per AngelList, which is roughly double. Moreover, tech entrepreneurs from both regions will tell you that it is more likely than not that final negotiations are nearer the higher end of that range than the lower.
Premier Li Keqiang recently visited the offices of Lagou in April, a top internet job posting site,... [+]
Chang stops his analysis at the director level as post-director level compensation often consists of primarily non-cash benefits and becomes very difficult to compare. In addition, it is important to note that many local Chinese companies provide other allowances as an incentive. Even for mid-level management, packages often include tax deductions for specified housing, food and transportation expenses, and the total can be as high as 30-35% of total cash income. If you’re interested in how much non-technical positions at these levels might cost your firm … the salaries may be up to 20% lower compared to their technical counterparts. Not cheap by any means. As I’ve advised many a portfolio company interested in coming into China, setting up a full team might be very expensive as well as highly competitive, and so hiring for potential rather than experience might be a wiser choice.
Also Beware Rampant Title Inflation
As the war for talent rages, many local Chinese companies have resorted to title inflation to entice candidates. For example, a “principal” at a multinational corporation generally needs at least 10 years of experience, but local firms will often award the distinction to candidates with just 7 years of experience. I mention this as a caveat for companies seeking to recruit talent in China – many titles don’t translate directly and an in depth understanding of corporate reporting lines is critical in both filtering for and negotiating with qualified candidates.
Who’s Hot and Who’s Not
Chang also shared with me the types of backgrounds tend to get the most love from employers currently. One of the quickest ways, he says, is to start off at a reputable MNC as these are known for their high bars for hiring and rigorous training programs. Local companies, which tend to be less structured, love to pick off MNC employees. “Because they are more results driven, local firms like ‘ready-to-go’ talent and these days often offer a 30-100% increase in pay to lure folks from MNCs,” according to Chang. “Certain job descriptions may even go as far as indicating higher priority in hiring talent from a specific MNC,” he added. With such aggressive hiring practices, it is no wonder that high churn is a frequent complaint I hear from tech CEOs.
In Conclusion
As a tech investor, I am heartened by the rising wages of developer talent in China, which (I hope!) means that there is real demand from fast-growing tech startups, and which also (I hope!) means that more and more talented young people are going to seriously consider a career in STEM. However, at the same time, I am a bit concerned by the rapid rise in development cost, which means that each dollar I put into a startup now buys fewer and fewer headcount, a trend not likely to reverse any time soon given the amount of capital being poured into tech investments --$15.5Bn in 2014 to be exact. Meanwhile, for startups, as we see development costs on both sides of the Pacific begin to converge, it will be interesting to see how technical teams might look a few years from now, and in which direction the talent will flow. All that’s certain is this – whether in the US or China, it is a great time to be a computer programmer.
Special thanks to Norman Chang of PCI Executive Search China for his help in compiling the data for this article.
