Why Google's Pay Hike Was Right

By Edward Tenner

The Washington Post's Jenna McGregor takes Google to task for an across-the-board pay increase of 10 percent instead of skewing the increase to the "best" performers, claiming that

giving a 10 percent salary increase to every single Google employee probably won't do enough to retain the company's best and brightest. And in fact, it could backfire. The company's hardest-working, most irreplaceable people could think all that extra effort is for nothing if their less talented colleagues see the same uptick in pay they do. And that could have them running for the door even faster.

There's admirable courage in questioning the judgment of a $200 billion company and over 85 percent of the responding readers of the Wall Street Journal, without citing a single empirical work in labor economics. But are Google's managers really fools squandering shareholders' money on (relative) slackers? I think they have logic on their side, and for two reasons.

First, risky, innovative work implies frequent dead ends and failures. Underlying hardware and software are also changing all the time. A person with a disappointing year might be developing the company's next hit. So while there will always be some people who are known to be absolutely critical and will accordingly be paid well above scale (as in entertainment), information about the long-term profitability of many others will remain ambiguous. (While in publishing I noticed that at least one editor at another university press was fired just before one of his contracted books was completed and published, and became one of the organization's most profitable titles.) Executives could investigate work in progress more closely and make some hard decisions -- but given their salaries, that would be more expensive for the company than simply paying everybody more and matching or beating outside offers as they are made. There may be some ultra-talented people who can never be financially satisfied, but it's better to help set them up as entrepreneurs with ties to the company than to bend the whole salary structure around them.

There's another factor, discussed in an earlier post: efficiency wages. Henry Ford paid a premium minimum daily wage, more than he had to, to keep high-quality prospective employees lined up at the factory gate. This was an important part of Ford's strategy in offering not the first inexpensive cars, or the first mass-produced cars, but the first (relatively) durable, well-made, reliable cheap cars. Google is in the tradition of John Gardner's idea that everybody, no matter what their education level or function in an organization, can and should be excellent at what they do.

This article available online at:

http://www.theatlantic.com/technology/archive/2010/11/why-googles-pay-hike-was-right/66405/