Criterios De Selección

Pay Unfairly

Why it’s okay to pay two people in the same job completely different amounts

I

never had the pleasure of working with Wayne Rosing, our first VP of engineering. He retired before my first day. But stories about him still percolate throughout Google. My favorite is about a speech he gave to our engineers in the weeks leading up to our initial public offering. It was about staying true to our values, focusing on the user, and how an IPO is just another day. The next day, we’re going to come back to work and keep building cool stuff for users. People will be richer, some unfathomably so. But that ought not change who we are. To underscore his point, he concluded: “If after we go public I see any lamborghinis in our parking lot, you better buy two of them because I’m going to take a baseball bat to the windshield of any parked here.”

Even though our IPO created many millionaires, we for many years stayed relatively free of the affectations of conspicuous consumption. This ostentation aversion is as much a reflection of the historic engineering culture of Silicon Valley as anything special about Google. New York Times journalist David Streitfeld traces it back to the “founding” of Silicon Valley in 1957,159 when Robert Noyce, Gordon Moore, Eugene Kleiner, and five others started Fairchild Semiconductor and developed a way to mass-produce silicon transistors.160 Streitfeld describes it as a “new kind of company … one that was all about openness and risk. The rigid hierarchy of the East was eliminated.

So was the conspicuous consumption.” “The money doesn’t seem real,” Noyce would later tell his father. “It’s just a way of keeping score.” 161 The ethos in the Valley has long been “Work hard, but don’t show off.”

That’s of course changed somewhat in recent years, even at Google. The spate of billion-dollar IPOs from companies like Facebook, LinkedIn, and Twitter, combined with the emergence of secondary markets that allow pre-IPO employees to sell shares at multibillion-dollar valuations, has flooded the Valley with money and more than its share of $100,000 Tesla Roadsters and million-dollar homes. Even so, journalist Nick Bilton summarized the current ethos:

In New York, you see people dressed to impress. In San Francisco, people take pride in wearing a hoodie and jeans to five-star restaurants (despite glossy magazine reports to the contrary).

And in New York people are ostentatious and flashy with their money.

In San Francisco? Sure, Lawrence J. Ellison, Oracle’s chief executive and America’s Cup champion, is more than happy to show off his wealth. But most wealthy people here tend to hide it, afraid that it won’t jibe with the we’re-here-to-make-the-world-a-better-place image of Silicon Valley. (I know of one successful founder who owns an old beat-up 1985 Honda that he drives to his secret private jet.)162

But Wayne’s comments had deeper roots than just giving advice about how to avoid the spasm of gluttony that often accompanies financial success. We had a culture of avoiding ostentation, from the

desks we made out of sawhorses and wooden doors to the discarded ski gondolas and monorail cars we reclaimed and used for conference rooms in our Zurich and Sydney offices.163

A decommissioned monorail in our Sydney, Australia, office. © Google, Inc.

A decommissioned gondola in the Zurich office. © Google, Inc.

For our products, the purest manifestation of this ethos was a clean, uncluttered search page. It was revolutionary at the time. The prevailing belief was that users wanted a single portal (remember Web portals?) to all of the Internet, with dozens of other portals nested within. Larry and Sergey had a different idea. What if all you had to do was type what you wanted and it magically appeared before you? Here’s how our home page compared to those of two leading competitors on February 29, 2000.164

Lycos.com home page from circa 2000.

Excite.com home page from circa 2000.

Google.com home page from circa 2000. © Google, Inc.

Our spare presentation was so unorthodox that one of our earliest challenges was that users would look at the Google Web page and not type anything. We couldn’t figure out why until we went out and did a user study at a nearby college, actually watching students try to use Google. According to Marissa Mayer, at the time a Googler and now CEO of Yahoo, they were so accustomed to cluttered

websites that “flashed, revolved, and asked you to punch the monkey” that they thought there had to be more coming.165 They weren’t searching because they were waiting for the page to finish loading.

Engineering vice president Jen Fitzpatrick added: “We wound up sticking a copyright tag at the bottom of the page, not so much because we needed a copyright on the page, but because it was a way to say ‘This is the end.’” The copyright notice fixed the problem.

Sergey once joked that the reason the Google home page was so empty was that he wasn’t very good at HTML, the programming language used to put up Web pages. According to Jen, the reality was that “It became a point of pride and a point of design intent to not throw lots of distractions at you. Our job was to get you from here to there as laser-fast as we could.” It was a better user experience: fewer distractions, faster load times, and a quicker path to the destination.166

Wayne’s careful consideration of how the IPO might change the culture was telling, though, because how to pay people—and how to do so fairly and in consonance with our values—has always been a serious question at Google. In fact, as a management team we have probably spent more time thinking through compensation issues than any other people issue, save recruiting. Recruiting, you’ll recall, always comes first, because if you’re hiring people who are better than yourself, most other people issues tend to sort themselves out.

For the first year or two, money was tight. But even once we figured out that you could auction advertising on the Internet (imagine!) and revenue started flowing in, we were reluctant to pay high salaries for most of our history. Before Google’s initial public offering, our average executive salary was about $140,000. On the one hand, $140,000 is a lot of money. On the other hand, that was for our top people. And the region our employees lived in, Santa Clara and San Mateo counties, had one of the highest costs of living in the country. As a company, our average wage was below the $87,000 median household income in the region.167

Almost every new hire took a cut in salary when joining. As I mentioned in chapter 3, we even used this as a recruiting screen, reasoning that only risk-seeking, entrepreneurial types would be willing to take a pay cut of $20,000, $50,000, or even $100,000. New hires were given a further test:

They could forgo $5,000 of salary in exchange for 5,000 additional stock options. (Anyone who took that deal would today have an extra $5 million in their pocket.liii)

As Google grew, we recognized that we’d have to change how we paid people. Low salaries and the promise of IPO-like stock awards wouldn’t attract the brightest talent forever. Journalist Alan Deutschman interviewed Sergey on this topic in 2005:

When there are only a few hundred people in a company, stock is a strong motivation, [Brin] says, because everyone gets enough options to have the chance to really make a lot of money. But “at thousands, it doesn’t work that well as an incentive,”

because there are so many people that the options have to be spread too thin. “And people want the chance to be really well rewarded.” Even though Google now has some 3,000 employees worldwide, he says, “I feel the compensation should be more like a startup’s [with lower salaries and more stock options]. Not entirely, because there’s significantly less risk. But more like one. We provide the upside—maybe not the identical upside, maybe a little less—and higher odds of being successful.”

We also wanted to make sure employees stayed hungry and ambitious enough to keep striving for big impact. We studied closely the experiences of other tech companies that had minted millionaires.

Deutschman observed that “At Microsoft in the ’90s, engineers and marketers took to wearing buttons around the office that said ‘fuifv.’ You can guess what the first two letters stand for. The last three meant ‘I’m fully vested.’”

That was the last thing we wanted!

We spent roughly the next decade making sure that, in addition to having all the right environmental factors and intrinsic rewards in place (our mission, a focus on transparency, a strong Googler voice in how the company operated, freedom to explore and fail and learn, physical spaces that facilitated collaboration), we fine-tuned the extrinsic rewards as well. It came down to four principles:

1. Pay unfairly.

2. Celebrate accomplishment, not compensation.

3. Make it easy to spread the love.

4. Reward thoughtful failure.

A caveat: I’ll be throwing around some big numbers in this chapter. Some of this is me rounding off to make the math more self-evident and to avoid getting mired in distracting details. But some of it details the opportunities Google has offered Googlers. Our founders have always been generous.

They believe in sharing the value the company creates with employees. As a result, it really is possible to earn, or be awarded, tremendous amounts of money at Google.

Most technology companies of our size stop granting meaningful stock awards to all employees.

Instead, they focus on giving bigger awards to executives, as the shares left to the rank and file dwindle to nothing. Outside our industry, one firm I know had a practice of making stock grants worth hundreds of thousands or millions of dollars to the senior executives (the top 0.3 percent), grants worth $10,000 to junior executives (the next 1 percent), and nothing to the other 98.7 percent of employees. Instead of rewarding the best people, they just larded more money onto the most senior ones. I remember one executive who told me privately that he was refusing to retire until his pension hit $500,000 per year (though in his defense, he was also brilliant at his job).

At Google, everyone is eligible for stock awards, at every level of the company and in every country. There are differences in the target award you’re eligible for, based on your job and the local market, but the biggest determinant of what you actually receive is your performance. We don’t have to include everyone, but we do. It’s good business, and it’s the right thing to do.

I realize that Google is in a privileged position. I remember working for $3.35 an hour, and how liberating it felt when I later found a job paying $4.25 an hour. And when I got a salaried job that paid

$34,000 a year, I felt like I’d never have a financial worry again. After my first paycheck I went out to dinner and for the first time felt flush enough to order an appetizer and a drink with my meal—luxury!

At the same time, companies in lower-margin industries have found that paying people well—even when they don’t need to—can be smart business. Costco and Wal-Mart’s Sam’s Club are both warehouse retailers. Wayne Cascio, of the University of Colorado Denver, compared the two in 2006.168

* Wal-Mart doesn’t disclose wages at Sam’s Club, but Cascio reports this as a likely range.

Sam’s Club vs. Costco.

In addition to offering higher wages, Costco paid 92 percent of the premiums for the 82 percent of employees who had health insurance at the time. Furthermore, 91 percent of employees participated in Costco’s retirement plan, with an average company contribution of $1,330 per employee. Despite this much-higher cost structure, and buoyed by a more affluent customer base and more big-ticket items, Costco generated $21,805 in operating profit per hourly-paid employee compared to $11,615 at Sam’s Club: 55 percent higher wages but 88 percent higher profit. Cascio explained that “In return for its generous wages and benefits, Costco gets one of the most loyal and productive workforces in all of retailing and … the lowest shrinkage (employee theft) figures in the industry. … Costco’s stable, productive workforce more than offsets its higher cost.”

I’m now choosing to share some of the most sensitive details of how Google has tackled this most private issue, not to flaunt Google’s success but because we made a bunch of mistakes in how we approached rewarding people. Along the way, we’ve studied pay and fairness and justice and happiness. We’ve learned a bit about how to celebrate success without breeding jealousy. We’ve applied insights from others and proven that what people think will bring them joy may not always be what does. My hope is that our experiences reveal some lessons that will apply in any work environment—just as they do at Costco—and unlock more freedom, celebration, and satisfaction.

Pay unfairly: Your best people are better than you think, and worth more than you pay them

In a misguided attempt to be “fair,” most companies design compensation systems that encourage the best performers and those with the most potential to quit. The first and most critical principle requires you to turn your back on received practice—and it might feel uncomfortable at first.

So-called best practices in compensation start with gathering market data for each job and then designing control limits around how much an employee’s individual pay can deviate from market pay and from that of other employees. Typically, companies might allow salaries to vary from market by plus or minus 20 percent, with the absolute best people perhaps 30 percent above market. An average performer might get a 2–3 percent salary increase each year, and an exceptional performer might get 5–10 percent, depending on the company. The perverse result is that if you are an exceptional performer, you will get a series of big increases that then get slower and eventually stop entirely as you approach the upper end of the permissible salary range.

So let’s imagine you’re doing great work and contributing a lot to your company as a top salesperson, a brilliant accountant, or a clever engineer. In your first year you might get a 10 percent raise, but the next year you’ll get 7 percent, and then perhaps 5 percent, and soon enough you’re either getting the same increases as an average performer or you’ve been “red circled” (as the HR people call it) and you won’t get salary increases at all! And similar limits apply to how bonuses and stock awards are managed in most places. A well-timed promotion can buy you a bit more time, but you’ll soon hit the limit at the next job level.

Something in this system is broken. Most companies manage pay like this to control costs and because they think the range of performance in a single job is somewhat narrow. But they are wrong.

Robert Frank and Philip Cook predicted in their 1995 book The Winner-Take-All Society that more and more jobs would be characterized by growing compensation inequality, as the best people became increasingly discoverable and mobile, and therefore more able to claim a greater share of the value they create for their employers. This is precisely what the Yankees figured out: The best

performers not only command the highest compensation, they will also deliver sustained exceptional results.

The problem is that it’s very possible for a person’s contribution to grow far more quickly than her compensation. For example, a top-tier consulting firm might pay a new MBA $100,000 per year, and charge clients $2,000 per day ($500,000 per year), roughly five times her salary. In the second year, the MBA might earn between $120,000 and $150,000 and be billed at $4,000 per day ($1 million a year), about eight times her salary. Independent of whether or not this consultant is creating $1 million of value for her employer or client, her share of the value she’s creating is dropping each year. This is an extreme example, but it’s a pattern that holds in most professional service firms. In fact, economist Edward Lazear of Stanford University has argued that people are on average underpaid relative to their contribution early in their careers, and overpaid later in their careers.169 Internal pay systems don’t move quickly enough or offer enough flexibility to pay the best people what they are actually worth.

The rational thing for you to do, as an exceptional performer, is to quit.

At a Fortune 100 large industrial company, the big “C-level” jobs (the three-initial jobs that start with that key word “chief”) turn over about once every five to ten years. If you are an exceptional thirty-or forty-year-old, you get a shot once every decade or so at these top jobs within your company.

In the meantime, your pay will move in fits and starts as you get a few big raises and then collide with HR policies that limit your pay until you get the next promotion. For those who are learning and growing most quickly and those performing at the highest level, the one way to make sure your pay is in line with the value you create is to leave the monopolistic internal market and enter the free market.

That is, look for a new job, negotiate based on what you are truly worth, then leave. And that’s exactly what you see in the labor market.

Why would a company design a system that makes the best and highest-potential people quit?

Because they have a misconception of what is fair and lack the courage to be honest with their people. Fairness in pay does not mean everyone at the same job level is paid the same or within 20 percent of one another.

Fairness is when pay is commensurate with contribution.liv As a result, there ought to be tremendous variance in pay for individuals. Remember Alan Eustace’s argument in chapter 3 that a top-notch engineer is worth three hundred average ones. Bill Gates took a more aggressive view, purportedly saying, “A great lathe operator commands several times the wage of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer.” The range of values for software engineers may be broader than for other jobs, but while a great accountant might not be worth a hundred average accountants, he’s surely worth more than three or four of them!

But don’t take my word for it. In 1979, Frank Schmidt, of the US Office of Personnel Management, wrote a groundbreaking paper titled “Impact of Valid Selection Procedures on Work-Force Productivity.” 170 Schmidt believed, as I’ve argued in chapters 3 and 4, that most hiring processes fail

But don’t take my word for it. In 1979, Frank Schmidt, of the US Office of Personnel Management, wrote a groundbreaking paper titled “Impact of Valid Selection Procedures on Work-Force Productivity.” 170 Schmidt believed, as I’ve argued in chapters 3 and 4, that most hiring processes fail

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