Case 2: Googles (now Alphabets) Evolving Pay Strategy

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, Googles 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 isnt the hot place to work and has become the safe place to work (per Robert Greene, who recruits engineers for 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 Barclays to be $400 million.51

Analysts say Google is facing what all Silicon Valley companies struggle with when they graduate from start-up status and into the realm of Big Tech.52 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 Page 297more than it was paying a few months ago and that salary is so far above the industry average that start-ups cannot match Googles 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, Googles stock price was around $560 and during 2018 (now as Alphabet), the stock price was much higher stillover $1,000! 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 regularly top Fortunes list of Best Companies to Work For.) We will talk more about employee stock plans and benefits in Part Three of your text.

Questions

1. Discuss Googles pay level? How well is it captured by salary alone?

2. Explain to what extend Google has made the right choices in changing its compensation strategy? How much do these changes cost?