Aubrey Daniels’ Blog

The headline read “Google Gives All Employees Surprise $1,000 Cash Bonus, 10% Raise.” While I believe that companies should work to pay employees as much as possible, there is a right and wrong way to do it.  From what I have read, Google is doing it wrong.  To paraphrase Thomas Gilbert, author of Human Competence, money is a finely honed instrument of motivation and deserves great respect.  What Google has done not only disrespects the instrument but also, in my opinion puts Google’s future in peril.

CEO Eric Schmidt said that an internal email survey revealed that employees value the salary part of their compensation far more highly than bonuses.  Duh!  If you were to offer employees a choice between $1000 now and the possibility of $1000 a year from now what do you think they would choose?  Behavioral research consistently shows that people prefer smaller, guaranteed rewards as opposed to larger, future and uncertain ones. 

From a behavioral perspective, I see several problems with Google’s actions:

1. Google is reinforcing “show-up” pay – It will not improve production, quality, customer service or creativity.  All one has to do to get this is enough to stay on the payroll.
2. Google is encumbering the company – The way the raise was given creates an ongoing obligation that will increase the cost of all their goods and services making them less competitive in the future.  The cost of the raise is somewhere between 1 and 2 billion dollars.  While Google is said to have $33 billion in savings, $2 billion may seem like chump change.  The problem is this is an ongoing obligation.  For someone making $100,000 per year (there are apparently many) they will get a $11,000 raise this year.  What is the future value of this raise?  Let’s assume the employee is 35 years old.  This means that over the next 20 years, this person is actually getting $200,000, not counting the compounding of the present raise by future increases, and surely there will be some.  Multiply this by 20,000 and you’ve got quite a future liability for the company.  What does the employee have to do to get this largess?  Be on the payroll!  He does not have to be grateful, productive or loyal.
3. It will not improve retention of employees.  Look at it this way. When seeking another job, say with Facebook where a number of key employees have gone, the current raise just increases the pay package that Facebook will have to offer, match or exceed to get a Google employee.
4. It feeds an entitlement mentality.  People respect most what they earn, not what they are given.  The impact of this raise will be measured in weeks, after which it is more likely to be, “What have you done for me lately?”
5. It increases extraneous reinforcement.  Think of the conversations in the break room, on cell phones and in the workplace focused on the raise, the company and management – all positive but at the expense of what they are actually paid to do.
6. It worries Wall Street.  Revenues at Google through the second quarter are up approximately 24% but operating expense is up over 34% from last year. Financial writers are already sounding the alarm on Wall Street.  Although the stock has risen over 35% so far this year, it is only back to where it was at the beginning of 2010.  As Dan Gallagher, of MarketWatch says, “The news may be a cause for concern among investors.”
7. It worries the industry.  While some of Google’s competitors may be smiling because they see the negative implications of the way Google is using money, they all will be plagued by employees who want to know why their company can’t do the same .

Are there any positives?

1. Google will attract more applicants – not that they need them but they certainly will get them.
2. They can put a bumper sticker on their cars that says, “My Company Gives Better Raises Than Yours.”
3. Free media attention. To get media coverage and raise the visibility of your company it could cost millions in advertising and media.  Google has gotten a lot for free! I wouldn’t categorize it as good press necessarily but it’s press nonetheless.
4. They are increasing merit pay.  I must add that performance-based pay outperforms salary every time, however even though “merit pay” sounds performance-based, it is usually screwed up as well.  Given how Google is misusing money, I don’t have much confidence they will do a better job with merit pay.

In the face of an increasingly competitive environment in the not too distant future, Google would do better in my opinion to put all this money into performance bonuses.  The same things that made Google what it is today are not the things that will keep it there.  In the early days at Google generous benefits, high salaries and a lavish work environment were small positives compared with the reinforcement associated with being part of groundbreaking and popular technology.  In the beginning, being an employee of Google brought admiration and awe.  Now this is available at other companies as well.  If Google continues to disrespect money in this way, there may be more “Facebooking” than Googleing in the future.