Discount, For Good or For Tech

Though little is disclosed officially, there is some anecdotal evidence that top graduates entering the tech industry can be paid up to $100k lump-sum for committing to join a firm after graduation. As our graduating classmates make their full-time employment decisions, these so-called signing bonuses are no doubt hard to resist. But we, from future Bay Area inhabitants to those entering the public service, should take care to think about the present value of our decisions.

The concept of present value is a cornerstone of financial theory and involves looking at future income backwards. The usual way we think about time and money is that if we had a dollar today, we could put it in a savings account with 1% interest and have $1.01 a year from now. But the flip side of this is that a dollar a year from now is worth 99 cents today, since we could invest those 99 cents at 1% interest to have a dollar then. We call the worth of next year’s dollar today—99 cents in this case—its present value, and the conversion rate between future money and money now, 1% here, the discount rate.

Interpreted more liberally, a discount rate measures how much less we like having something in the future than having the same thing today, and lets us move almost anything effortlessly through time. Happiness or a hundred-dollar bill next year would be great, but having half as much happiness or ninety dollars right now might be just as good to me. This mathematical time-travel is what underpins financial markets: Every investor knows that the value of a stock, bond, or exotic financial security should be roughly equal to the present value of the expected future cash flows you’ll receive for owning it.

Let’s suppose for the time being that we are looking for a job, and our only goal is to get money; in other words, we want to maximize the present value of earnings over our lifetimes. Before we continue, ask yourself the following: What is the least someone would have to pay you a year from now, for you to commit to paying them $1000 two years from now? If you would strike a deal for $800, we can guesstimate your subjective discount rate to be 25%. This is because you have effectively agreed to take out a loan for $800 next year, with the promise of paying it back with 25% interest two years from now. For those requiring payments of $900 and $950, these guesstimates are about 10% and 5% respectively.

Now, imagine we are faced with two job offers. The first would give us slightly more attractive long-term career prospects than the second (you would have better mentors or more chances to learn new skills), but otherwise, the jobs are the same. To quantify this small difference in potential growth, we will assume that taking the first job will result in an annual salary increase of 3.5% over the course of our careers, as opposed to an annual increase of 3% (roughly the average raise in 2015) by taking the second. Then, even if the second job offered a signing bonus of $10,000, $84,000, and $282,000, for subjective discount rates of 25%, 10%, and 5% respectively, the first job still would offer a higher present value of earnings.

In this scenario, half a percentage point of additional annual growth can be as attractive as a signing bonus of nearly $300,000! Of course, growth and discount rates are not constant or certain, humans don’t discount according to standard economic models, and getting money certainly isn’t the only goal in life. As such, the numbers above give the illusion of precision when there is little. However, I think they can still hint at the following: If one job can perceptibly offer us more latitude to grow, learn, and set ourselves up for a successful career in the long-term than another, nearly any signing bonus of realistic size should be close to a non-factor in our decision calculus.

Two objections commonly arise to this line of thought. The first goes like this: What if I need to trade a high-growth job for a fat signing bonus so I can help pay my parent’s bills right now? Here’s one solution: Instead of settling for a one-time bonus, you could take out a loan for your parents today, addressing the need for immediate money, and accept a sufficiently higher-growth job, which could cover the interest and potentially more.

The second objection involves joining a company just to collect its signing bonus, and leaving soon after. This is fine, as long as your career prospects afterwards would still be better than those of your other options. Signing bonuses are not bad per se; a great first job together with a big bonus is about as good as it gets.

But for all this talk about money, present value can also help us think about so much more. If our goal is to do good, the present value of the societal impact we make over our lifetimes is what should matter. For example, maybe working in a nonprofit corporate role with little direct impact, but many chances to learn about the industry and expand your network, might set you up to do more long-term good than working on the ground right out of college.

Ultimately, whether we’re on the West Coast or in nonprofit work, the idea of present value says that with the right discounting, money, doing good, and happiness years from now are fungible with money, doing good, and happiness today. As such, we should be careful not to act myopically for small victories in the here and now. Rather, we ought to prize the (appropriately discounted) future as we do the present.

Marshall M. Zhang ’16 is a statistics and math joint-concentrator in Mather House. His column appears on alternate Thursdays.