BREAKINGVIEWS - Google faces Wall Street-like pay quandary

Thu Nov 11, 2010 7:42pm IST

A Google search page is seen through the spectacles of a computer user in Leicester, central England July 20, 2007.  REUTERS/Darren Staples/Files

A Google search page is seen through the spectacles of a computer user in Leicester, central England July 20, 2007.

Credit: Reuters/Darren Staples/Files

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Robert Cyran

NEW YORK (Reuters Breakingviews) - Google faces a Wall Street-like pay quandary. With Silicon Valley engineers being wooed like investment bankers, the search giant is rolling out a company-wide 10 percent salary hike to retain talent. Yet Google's shares have stagnated, meaning it will take cash to compete. Facebook and Twitter options may still win the day.

Google's financial performance has been impressive, and there's little sign of a let-up. Revenue is expanding at a 25 percent annual clip and earnings even faster. To fuel the growth, headcount has increased by about 50 percent over the previous three years.

The company concedes it is in a "war for talent." And the price is rising with companies like Facebook expanding at a ferocious pace, often at Google's expense. A significant chunk of the social network's top employees, including its chief technology officer and chief operating officer, were plucked from Google.

One way to round up new whiz-kids is to buy their employers. This helps explain why Google agreed to pay $700 million for ITA Software, a developer for the travel industry, along with 40 other companies, mostly start-ups, this year. But as many financiers can attest from personal experience, there's no assurance rainmakers from big acquisitions will stick around, or that small hedge fund staff will enjoy working at a larger company.

One way to improve the odds is to pay more. Unfortunately for Google, the perception is that rivals will garner more of the future spoils. Valuations for hot companies like Zynga and Foursquare have gone through the roof. Meanwhile, Google's stock multiple has steadily compressed. It now trades at 19 times next year's estimated earnings, down from 36 three years ago. So it shouldn't surprise that employees now prefer salary increases to equity.

Yet in Silicon Valley, as in lower Manhattan, the years are few but the days brutishly long. If compensation is the best motivation, an extra chunk of cash can't compare to the chance at holding equity in tech's next darling. After all, most of Google's early employees probably could have landed a bigger paycheck at Microsoft.

CONTEXT NEWS

-- Google will give all its employees at least a 10 percent raise effective Jan. 1, 2011, and a holiday cash bonus. In addition, since employees have indicated salary is more important than a bonus or equity, the company will move a portion of each employee bonus into base salary, according to a memo first obtained by Business Insider.

-- The company's headcount was 23,331 at the end of last quarter. It was 15,916 at the end of the third quarter of 2007. Google's current stock price is slightly lower than it was three years ago.

(Editing by Jeffrey Goldfarb and Martin Langfield)

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