Google’s stock (GOOG) dropped modestly after the market opened as Wall Street processed the news that Google will give every employee in the company a 10%+ raise next year.
(The decline was very modest–less than 1%.)
As Doug Anmuth of Barclays notes below, the increased compensation costs will hit Google’s bottom line.
That said, we think the bottom-line fears are overblown because some of the change is the result of converting annual bonuses to salary.
We also doubt Google would make this move unless its current performance is strong.
We believe Google could potentially provide all worldwide full-time and part-time employees with: 1) a $1,000 holiday cash bonus this year; 2) a 10% salary increase in 2011; and 3) a portion of their bonus shifted to their salary in 2011.
Based on our year-end full-time headcount estimate of 23,391, a $1,000 bonus would amount to more than $23 million in 4Q costs on an EBITDA estimate of $3.7 billion. This is not a big deal and Google often has to catch up on bonus accruals at year-end.
However, the 10% across-the-board salary increase in 2011 could have a much bigger impact. Assuming an average salary of $150,000 per employee and average full-time headcount in our model of 25,756 for next year, a 10% increase would possibly suggest $400 million more in compensation costs in 2011. This could theoretically impact our EBITDA by 2.6% and PF EPS by roughly $1, or nearly 3%.
A couple factors to consider though in our calculations: 1) our headcount number is based on FT employees and the pay increase will go to PT employees as well, potentially suggesting a greater impact; 2) Google has likely given salary increases in the past and some of this may already be factored into our numbers—our cash opex is up 19% in 2011 and we already have PF operating margins down 30 bps Y/Y and EBITDA margins down 50 bps. This second point would suggest a smaller impact.
As GOOG suggested on the 3Q call, employee retention has become more challenging as GOOG matures and the Internet landscape evolves across start-ups and smaller companies. But we like GOOG’s increased investment in its employees and it would also suggest to us that business is likely going well. We remain positive on Google shares.