Reflections on the Google Pay Mix Reversal

In a move that reverberated through the business world and the HR interwebs, Google recently announced its decision to give a 10% raise to every one of its 23,000 employees, effective January.

Being the compensation geek that I am, I am particularly intrigued by the pay mix implications of the move.  Consider (from a recent Wall Street Journal article) Google Chief Executive Eric Schmidt's explanation of the decision in an email to employees:

Mr. Schmidt wrote that company surveys indicate salary is more important to Google employees than any other component of pay, such as bonuses or equity. He added the company was moving a portion of employees' bonuses into their base salaries, so they would receive some of it in every paycheck.

So, in response to retention issues and based on evidence that people prefer salary to bonuses or equity opportunities (quelle surprise!), the company opts to shift its pay mix by giving raises and moving dollars from a bonus (which is presumably contingent on performance) to guaranteed base pay.  Which would seem to fly in the face of a broader trend that's been underway for decades: a gradual decline in salary increase spending accompanied by persistent growth in variable pay (bonus/incentive) spending, captured in the chart below.

 
The chart, which features Hewitt research, provides a great visual of the proportional change in spending (with blue indicating average salary increase budgets and green indicating average variable pay spending for salaried exempt employees) that we've undergone from 1991 to 2010.

So... on the one hand we have data on our collective practices which shows an unmistakable march to a more leveraged pay mix, driven (I would submit) by employers' need and desire for a more flexible, performance-driven compensation cost structure.

On the other hand we have a major employer, one whose people management practices are widely regarded and often imitated, taking a deliberate and very public step in the opposite direction, driven by retention concerns in a particularly hot market for talent.

Do you agree with Google's move?  Is it just a blip in an overall reward landscape that seems to be moving to favor a more variable-heavy pay mix, an hint of cross winds that will blow as the talent wars heat up again, or a harbinger of a potential sea change that may lay in our future?  What's your take?

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time.  Follow her on Twitter at @annbares.

Comments

[E. James (Jim) Brennan]

In these turbulent seas, each ship will set and trim its sails in accord with its nature and destination. Most boats are built differently and their destinations are seldom identical, so most will vary in their rigging settings. But each and every one will attempt to act so as to survive their seas and to reach their ultimate destination.

An innovative enterprise battling in a tough talent war fought over scarce-skill superstars in a highly competitive industry faces different challenges than a bureaucratic organization in a tightly controlled industry with easily replaced workers. Predict that any trend patterns seen in the near future will be specific to whatever sample you observe: different sample, different trend.

The very fact everyone is talking about this simply proves what an exceptional aberration it is. If it were not such a unique one-of-a-kind thing, it would not be newsworthy at all.

[Laura Schroeder]

Well, although I agree in principle with the idea that after a certain point base pay no longer motivates, and also that mixed compensation instruments can be more effectively tied to performance, what Google has achieved in one stroke is making its employees (already hand picked high performers) more expensive to attract away. I think for Google this approach could work well. They probably retain everybody with it because they failed to distinguish the top performers - who may look for more recognition elsewhere - but they did just raise the bar on salary matching.

[Richard]

Google is a special case, as explained below, and it unlikely to set a precedent with this move.

As I'm sure you know, or should know as an informed compensation professional, the back story here is that Google is in war for talent with Facebook and other tech giants like Microsoft. Google recently entered into a consent decree with the DOJ to end their non-poaching agreement with other techs. So this bonus has been associated with that action to keep employees, to prevent them from being unhappy with the effect the non-poaching agreement has had on their salaries, and to stem possible employee law suits.

See this WSJ article quoted in part below:

WASHINGTON — Just six weeks after Google and five other technology firms agreed to scrap secret no-poaching agreements to avoid a Justice Department antitrust suit, the company has given all its employees a 10% pay rise to stop them from jumping ship.

Was it a coincidence, or should Google employees be sending Attorney General Eric Holder a giant thank you card? That’s the question being asked by some tech-watchers on the west coast and antitrust lawyers in D.C.

“I’m not sure about causation, but the correlation between the end of the no-poaching agreement and a large voluntary raise is striking,” said Eric Goldman, director of the High Tech Law Institute at Santa Clara University.

Google isn’t saying whether its big raise was related to the end of the do-not-poach agreements. “While we don’t typically comment on internal matters, we do believe that competitive compensation plans are important to the future of the company.” a company spokesman said.

http://blogs.wsj.com/law/2010/11/10/on-googles-10-percent-pay-hike-and-antitrust-law/

With all due respect, as a compensation professional supposedly in the know, I would hope that you would know more about your postings and do some simple research before you posted them to help your readers understand the events in the compensation field as much as you can. Or do you just post half the story, to create a false issue?

[Dan Walter]

Thanks this is a thought, and discussion, provoking posting.

I wasn't that surprised when Google did this. It brought me back to a time when Microsoft switched from all stock options to mostly RSUs. Some in the industry declared the death of stock options and many opined that nearly all equity would be RSUs within a year or two. As we know now, stock options are still alive and well.

Everyone wants their company to perform like Google. Google and many of the companies the world loves to use as prototypes for compensation are actually interesting because they are SO UNLIKE other companies. Compensation was a component in Google's success, but it was a much smaller player than their products, culture, ability to execute, timing and many other factors. Perhaps all of us should consider stopping the practice of using obvious outliers like Google as examples of what other companies should (or even can) do.

In this particular case I think Google is once again acting from a unique position.

1. The competition for talent, specifically their talent, is fierce. They have competitors offering employees as much $8,000 for talent poached from Google. Cash is a strong motivator of retention. It is also a strong shield against poaching. As some employees say "A bird in the hand is worth two stock option shares at a company that may not allow exercise for years."

2. Google is no longer a company that can expect to double its stock price on a regular basis. This reduces the potential value of stock options. With the exception of the steep dip that ended on Nov 21, 2008, Google's stock price from 2006 through today has pretty consistently stayed between $400 and $600. This means that options have less leverage in their value. Some of Google's competitors are not yet public, and perhaps have stock prices that can multiply many times over. In this case Cash is good for Google, Equity is good for competitors.

3. Equity is great if you don't have a ton of cash. This is not Google's problem. They can afford to pay cash in a market where many of their competitors cannot.

4. Many Google employees already have TON of equity. Paying additional cash to bring balance to employee compensation portfolios was likely overdue.

I can go on, but breakfast is calling.

In summary, I doubt this is the harbinger of a new "cash compensation" wave. Knowing Google and their love of data, they likely made this decision with far more information than the typical company can access. What I would love to see is the process and data used. THAT would truly fascinating.

[E James (Jim) Brennan]

In all fairness to those who pillory others for a lack of omniscience, I too was unaware of the latest settlement of DOL anti-poaching charges. Didn't see any news releases or related articles on it. Even now, weeks after the quiet agreement was made, the only comments I could find by online search on “google anti-poaching agreement” was a bunch of rumor blog speculations from sites like macrumors.com. The WSJ LawBlog Richard posted above had a lot more information. It was very helpful.

Not being a a Mac user nor habitue of gossip blogs nor attorney who haunts law blogs at subscription-only sites, I didn't know the details of the settlement, either. What a handful of software firms do is not determinative of a trend, even if they are some of the largest in their fields.

Deep and broad compensation tradecraft knowledge does not imply that one will know every legal agreement reached by every firm in the nation, especially if the settlement derived from employment recruiting practices rather than compensation issues.

Links with more details are http://mashable.com/2010/09/24/doj-anticompetitive-employee-agreement/ and this is the official DOJ news release http://www.justice.gov/opa/pr/2010/September/10-at-1076.html.

[Mario]

Not too sure about the accuracy of the following statement of Dan's. I think that its is safe to say that Microsoft, Apple, Intel, Adobe, Oracle, Cisco have enough money to do what Google has done for their valued employees.

Facebook is able to poach Google employees and Dan says that some companies pay a recruitment bonus of about $8,000 to do so. So it appears like others have the money to give Google type salary increases.

"Equity is great if you don't have a ton of cash. This is not Google's problem. They can afford to pay cash in a market where many of their competitors cannot."

[Ann Bares]

Thanks, everyone here, for taking my very simple (and admittedly - Richard - not deeply background researched... as the sources I read did not reference the non-poaching agreemt) observation and question, and responding with such wonderful information and discussion. What a great conversation!