How to Hire Engineers During an Economic Downturn

Combine lingering inflation + a looming recession + a wave of tech layoffs + cash-conscious companies, and you’ve got one potentially dismal view of the economy. Despite this recipe for gloom, one thing remains robust: the demand for top engineers.

As more mature companies cut staff, there’s an opportunity for growth companies to snap up engineers they might not have had as much of a chance of wooing just three months ago — without burning through their cash reserves.

To learn how, read on for insights on hiring trends, ways your company can respond, and info on how OpenComp can help you confidently make the best business decisions.

This article is based on OpenComp’s survey of 500 engineering leaders across the U.S., our compensation software platform data, and webinar “Secrets to Hiring Engineers in a Recession,” featuring Chris Starr, Senior Recruiter (Engineering Leadership) at Airbnb, Matt Hartley, Co-Founder & Chief Product Officer at BreachRx, and Julia Dow, VP Services (Compensation) at OpenComp.

Trend 1: Demand For Tech Engineers Remains High, But Available Cash for Pay is Lower

While growth companies have frozen hiring for nonessential roles, the recruiting doors are still open to engineers. More than 75% of companies need to hire more than 5 engineers this year, especially in companies of 51 to 100 employees, according to our survey. And it’s no surprise that the larger the company, the greater the need for talent.

How to respond:

What companies need and what they can afford don’t always align. That’s why for many businesses, a headcount plan is essentially the financial plan.

“When planning headcount, ask ‘What are we solving for by hiring more?” says Senior Engineering Recruiter Chris Starr of Airbnb.

Some companies may have to extend their hiring plan and lean on other areas of business to drive growth, adds BreachRx’s Co-founder & CTO Matt Hartley.

“Leaders need to be cognizant of the fact that you can't drive your people into the ground,” Hartley says. “We're being deliberate about our focus and our roadmap.”

Get it right:

To develop an affordable headcount plan, start with salary benchmarking and market analysis to measure how your company’s compensation plan stacks up against competitors. Use that information to create a compensation philosophy, the formal statement that explains how you’ll pay and reward your employees.

To ensure you’re building on the right information, use comp data that is:

• Less than a quarter old. As we’ve witnessed recently, the market can turn swiftly and you need the freshest comp data available to stay competitive.
• Reported and verified by employers. Employee-reported comp data, often found on free platforms, can be inflated.
• Relevant to your industry, company size, and stage of growth. This will give you an apples-to-apples comparison of your plan relative to the market.

Get it right:

OpenComp provides fresh, verified comp data, tailored to startups and growth companies. We can help you identify cost-to-market as well as actionable plans to stay competitive.

As your company grows, we can help you update your compensation philosophy so it always supports your current stage and goals.

Trend 2: Salaries for junior engineers and total compensation are rising

OpenComp’s compensation software platform's comp data reveals that base salary for engineers paid at the bottom of the pay range (mostly junior roles) is increasing faster than base salary for engineers paid at the top.

If pay ranges continue to shrink, we may see dissatisfaction among senior engineers who realize their junior counterparts are scoring higher starting salaries.

Another thing to consider: Total target compensation is rising faster than base salary year over year, a sign that companies are leaning on bonus structures more heavily to attract and retain employees.

How to respond:

To manage the potential effects of this trend, it’s helpful to understand worker motivations.

According to Starr, junior engineers are more likely to value compensation and typically stay with companies for two years. Meanwhile, more senior engineers value culture and opportunities, and have longer tenures with companies.

One way startups have found success winning and keeping engineers at all levels is by giving candidates a choice of balance between cash and equity.

Also, performance-based compensation is one way companies can ensure they’re putting resources behind their most impactful team members.

Get it right:

Model different scenarios to see possible consequences of hiring plans in different economic conditions. Choose the best one to help you scale up or down — and stick to it.

Headcount planning can be complex and tedious. It can also be the largest source of spend for most growth companies. Make it easy and get it right by enlisting the help of OpenComp’s Headcount Plan Feature. It brings financial analysis, comp data, and pay ranges together, so you get an accurate view of spend over multiple years with minimal effort.

Trend 3: Retaining engineers is another challenge

As with all roles, hiring engineers is just the beginning. You’ve got to do the work to keep them. Our compensation software platform's comp data reveals that’s not an easy task.

On average, engineers remain at a company for about 18 months, a relatively short time frame with expensive consequences. Surveys show it costs about 6 to 9 months of a person’s salary to replace them, meaning it could cost an average of $93K to 140K to replace a software engineer.

Machine learning engineers are the hardest to keep. They have the shortest tenure compared to other engineers, averaging just under one year at a company. When you consider how in demand they are, it makes sense that they’d also be the highest paid, both in terms of cash and equity.

How to respond:

To increase your chances of keeping the engineers you’ve worked hard to hire:

1. Establish a clear compensation plan and communicate what an employees’ growth path looks like within that plan.
   
   
2. Conduct burn modeling, which enables you to ensure you can hire and continue to reward your most impactful employees, without putting your runway at risk. Don’t forget, OpenComp’s Headcount Plan feature can help with this.

You may discover that adjusting pay ranges around the most essential roles makes sense.

Get it right:

As OpenComp’s CEO and Co-Founder Thanh Nguyen wrote, pay ranges are “the most important tool you can give your leaders and employees.”

Pay ranges can also be complicated and time-consuming to build. Save time and get ranges that are right for your organization with OpenComp’s Range Builder. Create professional-grade pay ranges in just 3- clicks, for free.

Trend 4: Equity is still key, but companies are offering less

Equity is decreasing by nearly 20% year over year, according to our compensation software platform's comp data. Despite this, the majority of survey respondents say equity matters more than cash to top engineers.

On the flip side, Total Target Compensation is rising faster than base salary year over year, indicating that companies are leaning on bonus structures more heavily to attract and retain top talent.

How to respond:

By leaning into equity, which takes two to fours years to vest, companies may position themselves competitively to attract high-performers and keep them longer.

Most candidates don’t have a full understanding of how equity works or the potential value of the equity component of your offer.

“Be able to tell your equity story because a lot of times, that’s lost on candidates,” says OpenComp’s Julia Dow.

Tools like an equity calculator can help show job candidates and employees the value of equity in different scenarios, without promising specific outcomes, she says.

Get it right:

Remember, markets and market data change quickly. OpenComp data is the most up-to-date source for market shifts, giving you the clearest picture of how to effectively and competitively offer equity.

A final reminder

While there’s much to be said about gut instincts, always lead with data first, no matter what position your company finds itself in during this economy.

“Engineering needs to be treated and run like a business,” says Hartley. “Many engineering leaders today don’t think that way because they’ve come up from a technical track, and really understanding where the business is going and being disciplined about your headcount plan is very important. It’s easy to say and hard to do, but right now, it’s really critical.”

Owen Bitas is Manager of Product Marketing at OpenComp and has held roles at 2A Consulting, Honda, and Rover.com. Connect with him on LinkedIn here.