Google's 10% Pay Raises: A Desperate Move to Buy Employee Loyalty

Last Updated Nov 10, 2010 12:24 PM EST

Google (GOOG) CEO Eric Schmidt told employees that they would get 10 percent raises next year and $1,000 holiday bonuses. But wait, there's more: additional raises equal to individual employee target bonuses as well as additional "merit increases."

Although it's good to see at least one company that's not trying to goose its profits at the expense of employee incomes, it's also true that your high flying company is in trouble is when you start paying bribes. Not bribes to government officials, but to customers, business partners, and employees.

It means that you've no longer got the juice that people really want, and that's happening now at Google. This isn't a stray incident. Rather, when you look at the company's past, it's an extension of business as usual and an indicator of Google's fundamental weakness.

The pay increases sound great if you're an employee, but not so much for shareholders. And from a human resources view, they are utter disaster. Using money as the major way to retain and reward employees is a desperation move. People want to feel useful and that their work matters. At Google, by contrast, anything you do today may well get abruptly jettisoned, since the company is unfocused and truly terrible at bringing concepts to market.

Google has suffered a rash of high profile recent departures. YouTube CEO Chad Hurley left his position and will become an advisor to the company. AdMob founder Omar Hamoui and Lars Rasmussen, the creator of Google Wave, both left.

It's one thing for entrepreneurs to leave. However, Rasmussen was a top engineer who went to rival Facebook, as have many others. According to a count that Glenn Kelman did on the Redfin corporate blog, of 2,174 Facebook employees with a LinkedIn profile, 378 previously worked at Google. (Clearly, Facebook was never part of the whole Silicon Valley non-poaching agreement that caught Department of Justice interest.)

People aren't bailing out of Google at a rate that would make you think the company had changed its name to Yahoo, but it's certainly happening fast enough to become noticeable. Unfortunately, if all you can do is offer more money to keep people, you end up with a workforce of mercenaries, which doesn't bode well for competitiveness. And yet, that's exactly how the company apparently thinks.

Google makes money by giving away services and showing ads. The entire company's ability to make money rests on the premise that you give away something in value to attract people and you then make revenue indirectly by their presence. It's worked to date for Google, but the company is stuck in the model. Sure, the money is great -- so far. Yet, to get it, Google essentially devalues its engineering, design, and product concepts.

Look at Google Apps. You'd think that it could turn the products into another good revenue generator, but Google basically has to give them away. The likely few hundred million Google makes annually off the software is nothing in comparison to the value it offers as presents in hopes that customers will come and stay. That strategy paid off handsomely in the case of search -- but only when Google acquired AdSense, which had a revenue mechanism.

You could cast Android in a similar light: give away something, effectively giving it a value of zero, to get something that might provide a revenue machine. The result is far more in revenue than most people have assumed. It's good money while it lasts, but again the effective mechanism is to entice someone -- hardware companies -- with something free. In this case, software.

When you've built a huge business on giving things away to make people like you, it's hard to stop. And why bother, if the money rolls in? Because when your perceived value goes to zero, you become dispensable, which only reinforces the need to further bribe people to do business with you. So there you are with your legions of mercenaries -- whether employees, customers, or business partners -- always wondering what you'll have to do next to keep the party going.

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Image: Flickr user AMagill, CC 2.0.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.