Bailout

When Google gets into a bidding war for its own talent

By Felix Salmon

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.

Full post as published by Macroprudential on November 12, 2010 (boomark / email).