Silicon Valley salaries are climbing so high the tech industry is at risk of a shakeout

Large technology firms used to hold on to their high-flying employees by agreeing not to poach them from each other. "If you hire a single one of these people, that means war," Steve Jobs, Apple's then boss, warned Sergey Brin, a founder of Google, in 2005.

That was an illegal arrangement, and in 2015 Apple, Google, Adobe and Intel paid a $415 million settlement to engineers whose pay had been held down as a result.

Today, wage suppression in Silicon Valley is a distant memory. Last year, technology companies in the U.S. recorded expenses of more than $40 billion in stock-based compensation. Exact comparisons are difficult, but to put that sum in perspective it is roughly 60 percent more than the bonus pool paid to the New York employees of Wall Street banks.

The money that tech firms throw at employees has ballooned as competition to hire and hang on to top talent in engineering, data science, artificial intelligence and digital marketing has soared. Even entry-level engineers can easily earn $120,000 a year; midcareer executives with technical expertise who choose to work at large public companies such as Apple, Google and Facebook will pocket several million, including stock grants. The boss of one start-up complains that he cannot find a competent chief operating officer who will work for less than $500,000 a year.

All this is driven by a number of elements. But the biggest spur is the enormous appetite for talent. Unlike the best lawyers or doctors, who can see only a limited number of people each day, those with exceptional technical expertise can transform a company because they are capable of creating products that are many times more attractive and thus a lot more lucrative, explains Marco Zappacosta of Thumbtack, a digital marketplace.

Google, Facebook and Amazon alone probably hire around 30 percent of all American computer-science undergraduates, reckons Roelof Botha of Sequoia, a venture-capital firm. These big public companies not only pay handsomely, but also wield a hiring advantage with the huge amount of stock they are willing to hand to promising candidates. Last year Alphabet, Google's parent company, issued around $5.3 billion in stock-based compensation, equivalent to a fifth of its gross profits. That amounts to an average of $85,000 per full-time employee.

Whereas nontech companies in the S&P 500 give out, on average, the equivalent of less than 1 percent of their revenue in stock-based compensation, the norm for big technology firms is around five times that. Last year Facebook, for example, recorded stock-based compensation expenses equivalent to around 17 percent of its sales; Workday, a software firm, and Twitter had stock-based charges of some 20 percent and 31 percent of their revenue, respectively.

Stock-based compensation is also being deployed to "strategically hoard" the best talent, said Patrick Moloney of Willis Towers Watson, a consultancy. Once locked in, that talent is then assigned to important projects. This deters people from going to rivals or launching their own start-ups.

To maintain their grip on top employees, the tech giants use several additional tactics. Some provide generous signing bonuses that can be clawed back if an employee leaves within three years. Amazon heavily weights stock grants to an employee's third and fourth year with the company, as an incentive for them to stay and continue to work hard. Another common practice is to offer a "retention" bonus to make employees who are considering going elsewhere reconsider.

"It's gone too far," said one venture capitalist among the many bemoaning how large public technology companies suck up so much talent with their lucrative equity packages.

Lacking the same resources, smaller start-ups blame the giants for distorting the market for high-flyers. "I get the feeling that I can't compete for objectively proven, brilliant talent," said Mike Driscoll, the boss of Metamarkets, an analytics start-up. "All I can do is hire diamonds in the rough, who will almost certainly get poached away by larger companies when they start to emerge as very talented." Smaller fry try to find employees with a different temperament, perhaps those willing to take greater risks or others who find working at a large company dispiriting.

The rising cost of talent has also pushed up the level of funding start-ups need to raise. The more money young firms raise from investors to pay their employees, the harder it is for them to break even or become profitable.