- Indeed: 3% of salary
- Intel: 5% of salary
- CVS: 5% of salary
But when I decided what level of employer contribution Steadily would make to our 401K plan, I chose 0%.
The reasons Steadily doesn’t contribute to our employee’s 401K are:
- To pay even bigger salaries
- Perks are inefficient compensation
- It’s a regressive form of compensation
When we calculate how much to offer for each role, we’re indexing to the top of each individual’s personal market. Specifically, we aim to pay more than 90% of all other offers a hire would receive from the job market.
Peer companies often offer a mid-market salary with annual bonuses, stock options, 401k match, and miscellaneous perks. Instead, we add up the cost of what all those things would cost Steadily if we offered them and convert that into a big salary. We believe, like Netflix, that “big salaries are the most efficient form of compensation.”
After we’ve made the big salary offer we let new hires choose if they want to receive some of that compensation as stock options in Steadily, anywhere from 0-30%. Most employees choose about 5%.
Perks are inefficient compensation
Once upon a time, I worked at a 20-person startup in San Francisco that, at employee request:
- Built a shower
- Brought in a yoga instructor once a week
- Reserved a group boxing class at a local gym
- Catered hot meals daily (think silver tray with burners, not brown bags)
Needless to say, we liked these perks. The shower got used 4-5 times a week, the yoga class started off with ten people and stabilized at four, the boxing class started off with five and stabilized at two, and the meals… well those had a 100% adoption rate.
But, I later learned that the shower room cost $25,000 to build. The yoga instructor charged $400 per class. The boxing gym cost $300 per class. The caterer cost $700 per day.
In other words, the cost to the company was:
- $33 per shower (we had a 3 year lease)
- $100 per person per yoga class
- $150 per person per boxing class
- $35 per person per meal
OK, the yoga and boxing classes were clearly an oops. And the shower didn’t get used as much as we all thought it would. And those meals were actually delicious.
Having decent in-office meals saves everybody a lot of time and more than pays for itself. For most other perks, employees value a dollar in their pocket more than a dollar of perks. In other words, perks are inefficient compensation.
When I say perks, I mean that broadly: imagine all the things a company writes a check for that employees use… buildings, travel, insurance, events, food.
To test the assertion that employees value cash over perks, let’s run a thought experiment:
- Think of a perk or benefit your company offers, let’s say one that costs the company ~$400 per year per employee.
- The company announces it’s giving each employee a $400 raise, and
- The company announces it’s removing the prepaid perk, but
- Any employee can opt to keep the perk instead of taking the raise
Importantly, the company is indifferent to what each employee chooses because it’s going to cost them $400 either way. So if even one employee opts to take the $400 raise instead of buying the perk it reveals that (for no extra cost) the company could have made those employees better off e.g. the perk was an inefficient form of compensation vs cash.
401K matching is a regressive form of compensation
At my last company, Interviewed, I elected to offer a generous 401K employer match, but 2 out of 5 employees still didn’t participate at all. Nationally, 31% of people with access to a 401K make zero contributions.
Intuition dictates that the folks who aren’t participating are the ones who can't afford to. That's true: high earners max out their 401Ks each year; low earners contribute little.
Employees who get matching employer contributions are getting a shadow bonus of up to $20,500 each year by the match, but only if they are wealthy enough to max out their 401K.
The employees who can’t afford to contribute to their 401K miss out on the shadow bonus.
Arguments for the employer match
Folks frequently make two arguments in favor of the employer match:
It raises the annual limit on total 401K contributions
True. The 2022 limit for employee contributions to a 401K is $20,500. But employers can contribute another $40,000 on top raising the total 401K limit to $61,000. Highly-paid employees who systematically max out their 401K do benefit from the elevated cap.
It’s tax advantaged
Somewhat false. There is no tax benefit to the employee if they're not maxing out their annual limit.
Given two scenarios:
A. Salary of $100K, employee contributes $10K, employer matches $10K. Take home: $90K. 401K balance: $20K.
B. Salary of $110K, employee contributes $20K, employer matches $0. Take home: $90K. 401K balance: $20K.
A and B are identical for personal income tax purposes, both in the year of contribution and at retirement withdrawal.
The only tax difference between A and B is for the employer. If the employer reported a profit and owes income tax, they receive an income tax deduction for the $10K they contributed in A. The corporate income tax rate is 21%, thus this would amount to $2.1K in tax savings for a profitable company.
I might be wrong
I am confident that converting fringe benefits into even bigger salaries at Steadily is optimal, because employees don’t value perks dollar-for-dollar.
But, 401K’s might be special. Societal expectations around employer matching combined with misunderstanding the tax treatment and contribution limits might swamp our “big salary” effect. Time will tell.
A great workplace is stunning colleagues. A great workplace is not espresso, lush benefits, sushi lunches, boozy parties, or nice offices. We do some of these things, but only if they are efficient at attracting and retaining stunning colleagues. – Netflix