When Google gets into a bidding war for its own talent

By Felix Salmon
November 12, 2010

No sooner do I have lots of good things to say about Google’s pay policies than Mike Arrington breaks the news that Google is keeping one engineer, who was threatening to decamp to Facebook, by paying him $3.5 million in restricted stock.

I suspect and hope, though, that the big across-the-board pay rise came after — and possibly as a result of — the $3.5 million deal. Because giving in to that kind of threat — “pay me or I leave” — is a horrible way to run a company.

Ben Horowitz explains why:

The other ambitious members of your staff will immediately agitate for raises as well… You will now spend time dealing with the political issues rather than actual performance issues. Importantly, if you have a competent board, you will not be able to give them all out-of-cycle raises, so your company executive raises will occur on a first-come, first-serve basis.

The less aggressive (but perhaps more competent) members of your team will be denied off-cycle raises simply by being apolitical.

The object lesson for your staff and the company will be the squeaky wheel gets the grease and the political employee gets the raise. Get ready for a whole lot of squeaky wheels.

Certain companies have reputations as places where loyalty isn’t rewarded, and where people only ever get small annual raises unless and until they go off and find themselves a more lucrative job offer elsewhere. At that point, the company suddenly realizes how valuable they are, and ups their pay substantially. Needless to say, employees at those companies have perverse incentives to spend their time looking for job offers, since that’s the best way to get a big raise.

Maybe, after waking up the morning after signing off on a $3.5 million retention bonus, Eric Schmidt saw the kind of company that Google was becoming and acted pre-emptively to put an end to such things. But his action would have been much more credible if he had explicitly said that Google was not going to get involved in bidding wars henceforth: if you want to defect to Facebook, then defect, but don’t expect Google to bend over backwards to retain someone exhibiting that kind of disloyalty.

The risk, then, is that the 10% pay rise notwithstanding, Google is still going to cave, on a case-by-case basis, to star engineers waving job offers elsewhere. In any given case, the decision might make sense. But as a general principle, it’s poisonous.

12 comments

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I’d like to abstract this incident in a slightly different direction. In a time of 10 percent unemployment, with underemployment adding several more points to that, what is the larger story with Google offering significant across-the-board raises, presumably to keep employees from jumping ship to more potentially lucrative opportunities?

Is it that our economy does, in fact, have a mismatch between skills and jobs (that’s pretty much my take)? Or is mobility the issue (that seems less likely in high-unemployment CA)? Or is it simply that we’re not all lucky enough to work for Google (I think that’s a possibility too)? Any thoughts?

Posted by Curmudgeon | Report as abusive

would it be a stretch to say that facebook is on its way to becoming worth more than google? once it launches a search engine informed by your friends’ choices, google loses the fight on having any hope of delivering more relevant results. game over google. maybe this is why facebook is poaching googlers.

Posted by swyx | Report as abusive

In a world of dynamically developing new technology there will surely always be a mismatch between skills and jobs because of the lag between the introduction of a new idea and getting enough people trained to meet its market needs.

As for the Google Blackmail incident, they should’ve just let the guy go. You can’t run a business with Prima Donnas.

Posted by FifthDecade | Report as abusive

@Fifth: Many economists claim that our unemployment/ underemployment is simply cyclical, and employment will return as soon as demand does. Others are saying that this unemployment is structural, and will stay with us even after demand returns. This anecdote seems to support the latter argument. You might make former case if Google were rewarding very specific skills, but that’s not the case here. Technical computer and software skills in general don’t seem to be in critically short supply.

Posted by Curmudgeon | Report as abusive

yes, there will always be niches, and there will always be a shortage of the highest skilled and most up-to-date and most brilliant people. that’s almost a tautology. they are few in number and in competition almost completely with each other. if you somehow were able to produce more of them, they would *poof* differentiate and compete among each other, and after a short time some few would end up being more qualified than the others. some of that would just be their luck as they would have picked the ‘hot’ area to focus on.

i agree with 5th decade. you can’t run a business with prima donnas. google should know this by now.

Posted by q_is_too_short | Report as abusive

as for structural unemployment this doesn’t say anything about that. of course there are some niches that can’t be filled, and people who can’t find a niche. but i would defy you to find a google engineer who couldn’t, if they were fired from google, find a pretty good job elsewhere.

Posted by q_is_too_short | Report as abusive

The term loyalty brings a moral aspect into this that is really inappropriate. “loyal” employees are asked to defer raises that the market will bear today but the company will not compensate them if they defer that opportunity to thelater “in-cycle” date and the market no longer offers that kind of opportunity. It’s asymmetric.

Posted by patrickinmaine | Report as abusive

FifthDecade & q_is_too_short — Well, yes, actually, you can run a business with prima donnas who threaten to leave for a better offer. It’s called investment banking.

Please note that I did not say you can run a business *well*.

Posted by EpicureanDeal | Report as abusive

Me, I can’t get exercised about Google in the slightest. The only thing that distinguishes this from two decades of comp committees backing up dump trucks full of money up the manicured driveways of completely fungible C-suite fodder is that the beneficiary in question was an engineer for a change. That’s it.

Should shareholders and the boards who supposedly represent them be dumping cash and free gamma positions on their executives? Probably not. Have they been doing so for decades now? Yes.

Posted by wcw | Report as abusive

Software engineers are often undercompensated according to their value. Google’s revenue per employee is in the $1.5 million range, and it’s generally accepted that a top performing engineer can be worth over 10x an average engineer; $3.5 million spread out over a few years may be cheap.

Posted by BarryKelly | Report as abusive

In a business where individuals regularly make a major difference to the bottomline, it pays to cave to these sort of demands. It is unlikely to become a widely spread principle because, by definition, these sort of people are a small percentage.

Of course, it would be better to try and pay them appropriately in the first place.

Posted by Danny_Black | Report as abusive

Man, if I ever needed confirmation that my idea to offer up “startup worthy” developers from Latam had legs, this was it. http://ow.ly/399qw

Posted by tropicalgringo | Report as abusive