A Solution To Google’s Talent Problem–Give Employees Equity Stakes In New Ventures

Google (NASDAQ: GOOG) keeps losing its top employees to other companies. Some of its senior management and best engineers have departed for AOL, Facebook, TellApart, Cuil, DoApp, and scores of other companies–many of them start-ups.

Google workers leave for several reasons. The first is that they can. Many of the search company’s early employees have made millions if not tens of millions of dollars from stock options. Google’s stock is not longer rising rapidly. That means options may be worth much less than they were just three years ago. So, many of these deserters believe that they can make another fortune at another enterprise.

Another reason employees quit is that Google is no longer considered the primary large innovative company in the tech world. A recovered economy means that the best new firms have access to capital. What they often lack is enough world class talent to grow rapidly.

Also, Google employees sometimes believe that they will be largely free of the bureaucracy that is always part of a huge corporation which is no longer growing quickly and has more than 20,000 employees.

Google will have to go well beyond the small bonuses that will be distributed at year-end along with salary increases. Many Google workers can increase their compensation much more than that by moving.

Google starts new enterprises or buys them on a regular basis. It spent $1.6 billion to buy 20 companies in the first three quarters of 2010. It is currently in talks, press reports say, to buy Groupon for $2.5 billion.  And, the search company can afford to expand through more acquisitions. It has more than $30 billion in cash.

Google has also started a number of successful enterprises in house. The most outstanding one recently may be the Android mobile OS which has overtaken Apple’s mobile operating system in US market share.

If Google wants to retain its best people, it will have to do something revolutionary. Google’s habit of innovation will need to spread to the way it treats its employees. Google will need to give out more than stock options. It will need to give the people who work on critical software or important businesses an equity stake in those businesses or shadow equity. It will need to do the same with strategic acquisitions. The idea is not new. It is not unusual for large firms to buy out smaller ones and allow founders and employees to keep an equity position which they can retain or which can be bought out later by the acquiring entity.

The New York Times recently wrote “Part of Google’s problem is that the best engineers are often the ones with the most entrepreneurial thirst. Google loaded up on that type in its early hiring.” The same is true when it bought firms like On2 and SocialDeck. Generous pay packages have very limited attraction. Ownership may be a much stronger magnet.

Google can still consolidate revenue from the companies if the amount of equity owned by key workers is relatively small. And Google has very limited options to keep its best people. It has to go down a different path than the one it has followed since its stock moved well over $700 a share two years ago, and its workforce base got so big that even the best people can be lost in the shuffle.

Douglas A. McIntyre