Bailout

Why Google?s cutting back on bonuses

By Felix Salmon

I love the way that Google is giving all its employees a 10% pay rise, and cutting back on payment in the form of bonuses and equity. CEO Eric Schmidt has, in a very Googlish way, got hard numbers on what his employees want, and so he’s giving it to them:

We?ve heard from your feedback on Googlegeist and other surveys that salary is more important to you than any other component of pay (i.e., bonus and equity). To address that, we?re moving a portion of your bonus into your base salary, so now it?s income you can count on, every time you get your paycheck.

Google, like most successful high-tech companies, wants to be a place where people love to work?and where they work all the better because they love to work there so much. That’s why it’s big on perks like free food, or luxury buses with fast wifi from San Francisco to Mountain View.

Of course, employees love to be paid well, too. And for any given level of annual pay, it’s entirely reasonable to want it in the form of a regular paycheck, rather than lumped into a bonus.

Employers prefer bonuses to paychecks for four main reasons:

1. They force employees to stay with the company, or lose their bonus.
2. They’re great from a cashflow perspective: instead of paying for labor as it’s performed, you pay for it months in arrears.
3. They’re not considered salary when giving out raises — that 10% raise, I’m sure, is on base salary, not total annual compensation.
4. When times get tough, it’s a lot easier to cut bonuses than it is to cut salaries.

All of these have equal and opposite reasons why employees don’t like bonuses. And on top of that, both managers and employees loathe the round of bureaucracy and performance review which always accompanies such things.

Google has more reason than most companies to minimize its bonuses. (Nice one-off gestures like its $1,000 holiday gift are something different.) For one thing, it’s sitting on so much cash, and interest rates are so low, that the cashflow benefits of a bonus system are de minimis. On top of that, it doesn’t want to force its employees to remain unhappily at Google just so that they can cash their bonus check when it arrives: it wants them to want to stay at Google. And as for salaries and raises, those are set by the external market for talent and are very unlikely to fall.

As a result, none of the standard reasons for paying employees in bonus form really obtains. Google’s employees might now find it easier to leave if they find a better opportunity elsewhere, but that will just force Google to continue to put a lot of effort into being the most attractive place to work that it can possibly be.

When Google was small and growing fast, a pay system based on bonuses and equity made sense: the company could be so much larger at the end of the year than it was at the beginning that it could afford to pay out much more money than it could have sensibly committed to paying employees a year earlier. What’s more, the stock was a great bet.

Now, however, Google is a much more mature company, with 23,000 employees in countries all over the world. Good for it for listening to those employees, and for paying them in a grown-up manner.

Full post as published by Macroprudential on November 10, 2010 (boomark / email).