Israeli tech in the Big 5's grip

The tech Big 5

High pay, shares that only go up, and few working hours… no wonder Facebook, Apple, Google, Amazon and Microsoft drain Israel's talent pool.

Six years ago, Amazon took its first steps in Israeli high-tech. It acquired Yokne'am-based Annapurna Labs, which had only 100 employees. Another giant, Apple, also began recruiting employees from a number of companies it had acquired, and inaugurated a development center.

At that time, in 2015, the Israeli high-tech industry was under control. It had only just begun to recover from the banking and real estate crisis. Unicorns hadn't yet come into existence, exits yielded sums in the hundreds of millions of dollars at most, and salaries allowed for a comfortable lifestyle. Apple Israel sought to maintain sanity and was known for being Spartan: people there worked hard, and earned well, but not a great deal above average. Google and Facebook were small islands of high pay, with a few hundred employees, but their impact on the industry in general was slight.

Amazon's entry into Israel changed all that. Google, Apple and other internet giants entered the fray, and the pay pendulum began swinging. The median wage for high-tech workers has risen by about 20%-30% in the last six months, and companies have begun implementing periodic wage-raising mechanisms, against the background of a shortage of at least 13,000 high-tech workers.

Amazon is not alone. The five technology giants became established in Israel and increased their presence in the local industry significantly. Estimates are that the five technology giants employ more than 6,000 people at their development centers. Although this group represents only 2% of all high-tech employees, it also represents the Israeli high-tech elite, and any movement within it affects the rest of the industry.

Do the "Big 5" US technology companies operating in Israel help local high-tech or lock it in a gold cage?

The recruiters: Come for an advanced training seminar - get a job offer

Amazon, Google, Facebook and Apple top the pay ladder, and what they pay is more than what appears on the pay slip. According to career data aggregator Levels.fyi, Facebook heads the pay table in Israel, with a median salary package of about NIS 900,000 a year in cash and shares. Google follows with NIS 780,000, Apple with NIS 760,000, and Amazon with NIS 643,000. Microsoft, although one of the Big 5 globally, pays a relatively low salary package.

The general pay package is just part of the picture. An infrastructure engineer with ten years' experience recently signed with Amazon on a package composed of NIS 50,000 monthly in cash, plus another $1.2 million in bonuses and Amazon shares. Admittedly, this is a specific segment of the population of graduates of particularly prestigious departments such as computer engineering and electrical engineering, but this is the core segment of the Israeli market. Like a locomotive, as it accelerates, the rest of the train moves accordingly.

Amazon, for example, has taken aggressive recruitment measures over the past few years. It makes personal contact with key engineers in companies and encourages them to attend recruitment meetings held in Israel by special delegations from the company's headquarters abroad, and even sends some potential recruits to its Vancouver office. "Globes" has learned of professional conferences held by the company for engineers at other companies, who thought they were there to learn about Amazon cloud computing, then found themselves with a job offer.

The deal clinchers: Shares in Amazon and Google

Stock-based compensation is perhaps the most significant benefit drawing senior engineers to the five giants. Facebook's stock component is the most generous, comprising 40% of the total salary, followed by Amazon with 22% of its median annual salary package.

The advantage of stock-based compensation is the ability to immediately receive high-value shares that almost exclusively tend to rise. These shares, issued to the employee every few months, can be held for as long as the employee wants, while the tax payment is deferred until they are sold. Finally, many tech giants run a program that encourages employees to set aside about 10% of their salary to purchase additional shares at a discount.

It's estimated that the average proceeds per employee from shares over the past year and a half were NIS 350,000 annually, post tax. Out of the total of options and restricted shares held by employees of the foreign development centers in Israel, valued at about $15 billion, about 30% belong to employees of the technology giants.

And honestly, who wouldn’t want to receive an Amazon share as a gift? The stock has risen 332% in the last five years. Shares of Alphabet, Google's parent company, have risen 80% in the past year.

Everyone gains from stock-based compensation - aside from the state. Unlike the pay slip of these engineers, who pay 50% tax, the stock package falls under the Restricted Stock Unit (RSU) category. Thus, only when an employee decides to sell the shares - and this can happen even years after leaving the company - do they pay a 50% tax on the value of the shares on the day they were received, while paying only 25% on the profit.

It is estimated that since the boom in Israeli high-tech started, about 50% of the tax paid by technology giant employees is on the value of stocks on the date received, and the rest is tax on gains.

"It’s important to note that the tax contribution of employees at foreign development centers is relatively large, because the shares they receive are usually of high value in the first place, and the employees pay tax on that" says Odelia Pollak, CEO of ESOP, a subsidiary of Excellence Investment House, which handles stock-based compensation programs for most of the global companies operating in Israel.

In some cases, the development centers give an additional share bonus by the second year of employment, just to help staffers make the right decision: to stay and work for the company.

The price: "Big 5" pull wages up

The expansion is reflected by an entry into new areas of activity. Increased demand for quality high-tech workers has raised wages in the sector, and hence also for those paid huge salaries by multinationals, and for employees of the most prestigious startups. According to placement service Nisha, this year, for the first time, the proportion of employees in the industry with salaries of over NIS 50,000 a month surpassed 10%.

"This increase is due to the growing demand for talent among international companies, Unicorn companies, startups, and companies that have raised funds, or are preparing for an IPO," says Nisha Group CEO Dana Lavie. "There’s also a domino effect - these companies will pay higher salaries to senior employees, and accordingly, to lower-ranking employees as well."

Corporate taxation: The Tax Authority fears confrontation

Israeli high-tech companies pay a 23% corporate tax rate on their profits - if there are any. But the five giants - considered foreign companies in every respect - enjoy a reduced tax rate on exports of development services intended for non-residents, at a rate of 16% on profit.

But that’s not all the discounts afforded to foreign companies. The way profits are calculated is also a benefit. Companies such as Microsoft, Apple or Amazon do not develop full products in Israel but only specific software components - although, in some cases, key components - and therefore enjoy development center status.

In recent years, there has been a tendency to adopt a stricter policy vis-à-vis foreign development centers. "The Tax Authority - with the backing of the OECD - is trying to increase collection from development centers of foreign companies," says Dina Pasca-Raz, partner and head of technology at KPMG Israel and KPMG International. "Globes" has learned that more and more tax officials are conducting tax audits at foreign development centers and demanding an increase in reported profit. In some cases, "Globes" has learned, these disputes have reached the courts in total secrecy.

A senior tax lawyer says: "Ultimately, the companies and the Tax Authority prefer to reach agreement and avoid litigation. The Tax Authority is also afraid of confrontation because it would create antagonism at the companies, and raise fears of dual taxation which would deter them from operating in Israel or expanding their activities here."

The Culture: Work two hours a day, wait for retirement

Aharon Aharon, former CEO of the Innovation Authority and CEO of Apple Israel, believes that the benefits of foreign technology giants outweigh their disadvantages for the economy. "Their significant advantage is that they teach proper management here. In addition, they expose Israeli workers to the most advanced technologies in the world," he told "Globes". "Google was the first in Israel to deal in artificial intelligence, and Apple brought the world’s most innovative technology in chip development."

However, there are many reports of a permissive, pampering enterprise culture that casts doubt on the image of the productive Israeli high-tech worker. Many managers we spoke to talked about employees being swallowed up into Google, Facebook and Amazon, enjoying flexible working hours, and low expectations. "Sometimes these companies hire talented employees, just so that the competitor won't get them," says a manager at one company which competes with the giants in employee recruitment. "Some come into work for an hour or two, and no one asks them what they did today."

Noam Bardin, who sold Waze to Google - and recently left - revealed that Google's work culture does not encourage diligence or innovation.

"An enterprise culture has come about here of employees who don’t work hard and mainly wait for the annual bonus distribution," says a manager who works for one of the competing companies. A number of executives we spoke to stated that they know at least one employee at an international company who has given up on the dream of starting a new company and elected to stay in the golden cage. Has this had an effect on the number of new companies? According to the Israel Innovation Authority, there has been a sharp decline in the number of new startups in recent years, from 1,404 new companies at their peak in 2014, to 520 in 2020.

Uri Beitler, CEO of chip-startup Pliops, competes every day against the technology giants. "We pique the interest of people who feel they’ve gotten a bit ‘stuck’ and are interested, at least for a few years, to jump into the water. I can’t offer them publicly traded shares, but the options we give to our new employees are equal in value to the shares granted by the big companies, and with a growth company like Pliops, it means a significant upside with the company's success."

Published by Globes, Israel business news - en.globes.co.il - on August 16, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

The tech Big 5
The tech Big 5
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