Google confronts brain drain

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April 12, 2007|By Mark Schwanhausser and Elise Ackerman | Mark Schwanhausser and Elise Ackerman,San Jose Mercury News

SAN JOSE, Calif. -- Less than three years after it went public, Google is confronting one of the more confounding consequences of its phenomenal success: a potential brain drain if its earliest - and richest - employees quit after earning the right to cash in the last of the stock options that made them millionaires.

Hundreds of the 2,300 Googlers hired before the Internet juggernaut's initial public offering in August 2004 are hitting their fourth anniversary. When they do, they'll be free to cash in the final portions of their pre-IPO stock options, collectively worth an estimated $2.6 billion before taxes.

So far, the exodus has been limited to a "handful of people," said Stacy Savides Sullivan, Google's chief culture officer and a 43-year-old pre-IPO millionaire herself. "We anticipated more because we think it would only be natural. We worry every day about this and hope we can stay ahead of it."

Senior executives have viewed this problem as a significant risk and have been taking aggressive and innovative steps to retain early employees, including mixing in other forms of stock compensation and rolling out a first-of-its-kind in-house market this month that will enable workers to sell even "underwater" options - those with a grant price higher than the current stock price. Google also is working on softer issues, from conducting an annual "happiness" survey to outright coddling of critical talent.

Still, Google executives know some people will leave anyway: some because their jobs no longer seem challenging, others to start a restaurant, found a nonprofit or build a dream house.

Despite the mind-boggling dollar figures, Google's story is no anomaly. Every Silicon Valley start-up that dishes up stock options to lure workers faces a similar predicament if an initial public offering is successful.

"This is what any of these companies struggle with," said Steve Patchel, a tech-industry pay consultant in Watson Wyatt's Santa Clara, Calif., office. "There are all these moving parts. Nobody can ever get it perfect."

Google's story is also a case study of how companies must learn to manage overnight millionaires who think more like "volunteers" because they're no longer motivated primarily by pay and can quit at any moment. Google's pre-IPO crew, for instance, is sitting on $2 billion worth of options that have vested and can be cashed in at a moment's notice. And that doesn't count the riches they took off the table last year alone by exercising more than 6 million options with strike prices ranging from a penny to the $85 IPO price.

The stock has been trading over $400 for months, and hit a high of $509.65 at Thanksgiving. It closed at $464.53 yesterday.

The Google employees' good fortune could stir jealousies as less-fortunate later hires park their Hondas next to a cube-mate's Ferrari, then head into the office to shoulder an equal share of the workload. And when the stock price tails off after years of explosive growth, somehow companies like Google must reformulate their mix of pay, stock and perks to retain those already-wealthy workers and attract new recruits because options won't continue to have a big payoff.

For now, though, hundreds of Google's pre-IPO crew are still bound with "golden handcuffs." Under Google's vesting rules, employees typically earn the right to cash in 25 percent of their options when they hit their first anniversary, then the rest in monthly chunks over the next three years.

For example, if Google gave an employee 10,000 options in 2003 - a figure some experts say is on the low side - the typical pre-IPO Googler's shares are worth an estimated $4.7 million.

So, sticking it out until the fourth anniversary would be worth about $98,000 a month, $3,200 a day or $400 an hour to the average employee. That's on top of regular salary and any other options, restricted stock or bonuses.

That kind of money would make anyone rethink their lives. With that in mind, Google also has drawn up lists of its most valuable pre-IPO "old-timers" and is pressing managers to keep tabs on their mood swings and professional goals. These workers are encouraged to speak up if they want to tackle a new job, work part-time or take a leave before they start feeling burned out, for example.

"We always have to be understanding where their heads are at," Sullivan said.

Google already has lost some key early employees. Among them are Doug Edwards, the marketing guy who named the "Adwords" advertising product that is Google's golden goose, and Charlie Ayers, the chef who concocted the secret sauce of yummy food and old-fashioned fun that became a hallmark of Google's corporate culture.

"There's the notion that it's not as much fun and that you don't have to stay there if you don't want to," said Edwards, who resigned in 2005, shortly after his boss left. "You start looking for excuses, and they are not hard to find."

Ayers said he always planned to leave Google after his options vested. "I joined Google for one reason," he said. "I wouldn't work that hard for anyone else ever again. I would only work that hard for myself."

Sullivan can relate. Hired when Google had only about 50 employees, her first stock options finished vesting in 2003.

"I know this sounds corny, but I still have fun here," she said, then adds a remark that cuts to the heart of Google's challenge.

"That's the only reason I stay. If it weren't enjoyable, I would leave."

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