Large tech companies have figured out a new compensation model to incentivize their most productive employees: stock options in startups that are external, but under their control.

Compensation is not structured consistently in the tech industry.

Startup employees, especially founders, earn a base cash salary but the vast majority of their compensation, in upside cases, comes through equity. The most successful startups employees can earn many millions of dollars or more if their company has a big exit. It’s pay for performance.

Employee compensation at big tech companies like Microsoft or Google is different. Employees here generally earn a healthy cash salary but have nowhere near the upside of many startup employees. Payment is not particularly performance-based.

It’s true that at large tech companies many employees receive a meaningful percentage of their compensation through stock options. But, critically, while the amount of options granted might vary somewhat based on performance, the trajectory of the company’s stock itself is only connected in a miniscule way to the performance of the employee. Google has 175K employees; the average programmer is just not going to affect Google’s stock price.

It’s a classic collective action problem. Tech companies benefit tremendously if their employees collectively work hard and drive the stock price up but most individuals have no meaningful impact on whether the company is successful. Unlike in startups, incentives are not truly aligned.

What’s to be done?

I think big tech has finally started to figure it out.

Consider Microsoft’s investment in OpenAI. This investment is rumored to be as much as $13B and gives Microsoft 49% ownership of OpenAI. OpenAI’s models are increasingly being integrated into Microsoft’s products. Microsoft doesn’t technically own OpenAI, but it certainly realizes much of the benefit of OpenAI’s success. Google and Amazon have similar deals with OpenAI competitor Anthropic.

OpenAI’s latest valuation was ~$80B and it has about 800 employees. Even if the employees now collectively own only 20% of the business, that’s average ownership per employee of $20mm(!). And because there’s still a relatively small number of employees, each employee can meaningfully affect the business. These employees have the ownership and the potential to actually impact the company, both required to make them really care about the business. Talk about “ownership mentality.”

Microsoft has therefore found a way to pay the employees working on its most critical new growth area–AI–by allowing them to vest stock options in a company it doesn’t technically own, but effectively controls.

And OpenAI’s success likely means we’ll be seeing more of this clever compensation model in the future.