Essay Sample on Google's Pay Level

Introduction

Google's pay level is defined by the total compensation which includes base salary, benefits as well as stock options and stock grants (Ivancevich & Konopaske, 2013). A report suggests that Google is paying computer science majors salaries of between $90,000 and $105,000 (Milkovich, Newman & Gerhart, 2013, p. 291). The total compensation varies from one category of employees and depends on the number of stock options or grants awarded. Google has 7.64 million stock options valued at $308.57 (Milkovich, Newman & Gerhart, 2013, p. 291).

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The answer to the above question depends on the point in time it is answered. This is because pay level includes base salary, stock options, among other benefits (Ivancevich & Konopaske, 2013). These variables are not constant since the company can review the amounts to achieve strategic objectives. Google repriced its stock options indicating that the pay level before repricing the stock options differs from the pay level after repricing. The stock option exercise price was reduced by $213.43 from $522 to $308.57 (Milkovich, Newman & Gerhart, 2013, p. 291). It implies that the pay level on the day after it repriced employee stock options was $213.43 more than that on the day before, for each stock option awarded.

Google's decision to reprice stock options was a strategy to make its pay level more competitive. This was mainly because its product life cycle changed from growth to maintenance (Milkovich, Newman & Gerhart, 2013, p. 291). The change in product life cycle is evidenced by the decline in the company's stock market price. In 1994 when Google went public, its stock price was $100 and this increased to $747 in November 2007 ((Milkovich, Newman & Gerhart, 2013, p. 291). However, as of May 2012, the stock price had declined to $600 (Milkovich, Newman & Gerhart, 2013, p. 291). Repricing stock options when the market price is falling is essential to prevent the stock options from becoming 'underwater' thus encouraging employees to exercise them (Pirchegger, 2002). Employees value a stock option by comparing the exercise price with the current market price (Wu, 2009). The difference between the exercise price and the actual market price is the value of compensation the company 'pays' to the employee (Pirchegger, 2002). If the strike price is close to or higher than the market price, employees are unlikely to exercise the stock options hence they lose their significance in motivating employees (Kalpathy, 2007).

The 10% salary increase was motivated by the change in the product life cycle where the company relies more on cash than stock options, a similar strategy followed by Microsoft (Milkovich, Newman & Gerhart, 2013, p. 291). Google's salary rise of 10% was higher than the 2-3% annual increase typical of the industry (Milkovich, Newman & Gerhart, 2013, p. 291). This is probably a strategy to attract and retain the best employees and position itself as the best employer in the tech industry. According to Carter and Lynch (2004), stock option repricing has limited effect on employee turnover. Thus, salary increase is critical for Google's retention strategy.

Google made the right choice in changing its compensation strategy. Increasing salary by 10% and repricing employee stock options make Google's compensation package more competitive thus motivating employees and helps it to attract and retain the most qualified professionals in the industry (Boxall & Purcell, 2016). Barclay's estimate that Google's salary increase will cost it $400 million while the 2011 stock-related compensation will cost the company $2 billion ((Milkovich, Newman & Gerhart, 2013, p. 291). The cost constitutes a small percentage of Google's operating income and cost. For instance, in 2017, Google's operating cost and income were $84.7 billion and $26 billion respectively.

Conclusion

The increased compensation costs are likely to be a good investment. Google will be able to improve the motivation of its workers and attract the most skilled and qualified employees in the market (Boxall & Purcell, 2016). This will enhance innovation which is critical to Google's business. Thus, the increased compensation costs are likely to result in increased revenue and profitability.

References

Boxall, P., & Purcell, J. (2016). Strategy and human resource management. New York: Palgrave Macmillan.

Carter, M., & Lynch, L. (2004). The effect of stock option repricing on employee turnover.

Journal Of Accounting And Economics, 37(1), 91-112. doi: 10.1016/j.jacceco.2003.06.002

Ivancevich, J., & Konopaske, R. (2013). Human resource management. New York, NY: McGraw-Hill Irwin.

Kalpathy, S. (2007). Stock Option Repricing and its Alternatives: an Empirical Examination.

SSRN Electronic Journal. doi: 10.2139/ssrn.872332

Milkovich, G., Newman, J., & Gerhart, B. (2013). Compensation. University of Oregon, John Henry Nash Fine Arts Press.

Pirchegger, B. (2002). Costs and Benefits from Repricing Employee Stock Options.

Schmalenbach Business Review, 54(1), 80-111. doi: 10.1007/bf03396646

Wu, Y. (2009). The incentive effect of repricing in employee stock options. Review Of

Accounting And Finance, 8(1), 38-53. doi: 10.1108/14757700910934229