Microsoft had changed its pay strategy to rely less on stock options, more on stock grants, and

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Question:

Microsoft had changed its pay strategy to rely less on stock options, more on stock grants, and then to rely less on stock grants and more on cash as its product cycle phase changed from growth to maintenance and its stock price growth slowed (at least back then it had). Google went public in 1994 and its stock price, already at around $100/share at that point, then rose rapidly (a great big understatement), peaking at around $37048 in November 2007. However, as of May 2012, Google's stock price was right around $300 (with a 52-week high of about $335). As a result, Google was subjected to comments such as "Google isn't the hot place to work" and has "become the safe place to work" (per someone recruiting engineers for then start-ups such as Facebook).49 Perhaps following in the footsteps of Microsoft, Google announced that it was giving a 10 percent across the board increase in salary. Not stock options. Not stock grants (but, see below). Salary.50 The cost of the salary increase was estimated by Barclay's to be $400 million.51

"Analysts say Google is facing what all Silicon Valley companies struggle with when they graduate from startup status and into the realm of Big Tech.:" With or without the 10 percent increase, one report says that Google was "paying computer science majors just out of college as much as $20,000 more than it was paying a few months ago" and that salary "is so far above the industry average that start-ups cannot match Google's salaries."53 (Actually, one might ask how many non-start-ups are likely to match such salaries.)

It is also noteworthy that Google repriced 7.64 million stock options in 2009. Of 20,200 total employees, 15,642 took advantage of the opportunity to replace their existing options, which had an average exercise price of $522, with new options having an exercise price of $308.57.54 By one estimate, Google was on a path to spend $2 billion on stock-related compensation in 2011.55 Subsequently, Google moved from stock options to restricted stock units for employees. The latter are actual grants of stock and are restricted in the sense that employees need to remain with Google for a minimum amount of time.

As of early 2015, Google's stock price was around $560 and during mid-2021 (now as Alphabet), the stock price was much higher stillover $2,200! Thus, employee stock-related wealth has soared. That goes along with their high salaries (see above) and their well-known extensive benefits. (Recall from Chapter 2 that they have regularly topped Fortune's list and Forbes' list of top employers. We will talk more about employee stock plans and benefits in Part Three of your text. In retrospect, it looks like it may have been premature to conclude that Google had transitioned from a growth company to a maintenance/mature company. (Much as what happed with Microsoft.)

QUESTIONS:

What is Google's pay level? How do you define and measure its pay level? How well is it captured by salary alone?

Does your answer to the above question depend on what point in time it is answered? For example, what was Google's pay level the day before it repriced employee stock options? What was Google's pay level the day after it repriced employee stock options? And now?

Why did Google reprice its stock options and also give a 10 percent salary increase (in an era when 2 to 3 percent annual salary increase budgets are the norm)? Is it because its business strategy and/or product life cycle changed? Is it because it was concerned that employees' perceived value of compensation did not match what Google was spending?

Do you think Google has made the right choices in changing its compensation strategy? How much do these changes cost? How do these costs compare to Google's total costs and operating income? Are these increased compensation costs likely to be a good investment? In other words, will they pay for themselves (and more)? Explain.

Do you get the sense that companies act on the best information they have at the time, but that in retrospect, they are not so good at predicting the future?

Will Google's pay strategy work "forever"? What changes might be needed going forward?