Here’s a moonshot: Make Google Employee Owned
This post as: Podcast | tldr Twitter thread | Jump to the punchline towards the end of this post
Quick Recap:
In my previous post in this series, I shared my views on the motivation behind layoffs at Google and suggested employee-ownership as a solution to prevent them. A company is generally considered to be employee-owned if 30%+ of company ownership is spread across 50%+ of employee base.
Below is a tldr of my previous post (also on Twitter tldr | podcast)
Reasons layoffs triggered despite profits & long term story: The decision owners, who are one of several personas covered in my post, are incentivized for moving the stock price in a ~2 year timeframe. In slow growth environments, layoffs can be an effective trick.
Path for Google employees to prevent layoffs: A corporate structure rooted in employee-ownership is resilient and better at aligning incentives in the long term. Google’s stock based compensation over the last 12 years was large enough to possibly provide ~10% of Google ownership to employees.
Why do I care: I have a strong affinity towards Google. Also my startup, Zolidar, is building SaaS and copilot tools for easing adoption of shared ownership at small & medium businesses in the US.
To continue, let’s begin from the beginning — Google’s 2004 IPO
It was the time when “Don’t Be Evil” actually worked.
Yes. Don’t. Be. Evil. The frequently used, often abused, always memed motto that made Google different. It was the source for everything that led to Google creating a special bond with its employees. I was one of those employees. Three times in fact.
In the 2004 IPO letter, aptly titled an owner’s manual, the founders were very intentional about how they would operate Google. The phrase “long term” appears 36 times in this letter, defined as three to five years for early results on key efforts. The founders outlined plans to apply a world positive lens even when financial returns are unclear. They mentioned their unabashedness towards making high risk, high reward bets. They refused to follow the norm of providing forward looking guidance, and they introduced the dual class structure giving them outsized control on the fate of Google.
Their message to investors, execs, and employees was loud and clear. Google was going to be a risk-taking benevolent dictatorship with a long time horizon for building shareholder wealth. Buyer beware!
Larry, Sergey, and Eric perfectly aligned their own incentives with shareholders and employees. They took a token $1 salary and focused on growing the worth of their existing ownership in Google.
There could not have been a more unconventional way to run a capitalistic organization. Yet Google did it. Successfully! Anyone who bought into the Google story was rewarded phenomenally over the next several decades.
Now Google’s corporate structure is lagging behind and proving ineffective. I guess OpenAI is leading on this front too. However, no harm in playing catch-up. Read about OpenAI’s corporate structure here.
The road to evil is paved with good intentions
The Google founders have gone to great lengths to retain their ability to run the company without any outside influence on strategic decisions. At the time of the IPO in 2004, they applied a dual class structure that gave 61.4% of voting power to insiders. In 2014, they doubled down by creating a non-voting class of stock, mostly to prevent dilution of control from stock issued for acquisitions and stock based compensation. However, the settlement for a class action lawsuit against this split requires the founders to divest their voting stock whenever they sell their non-voting stock. So their share of control has continued to decline as shown in the chart below. To stem this downward trajectory, in July 2021 the board approved the repurchase plan to also cover voting Class A shares — this will help the founders’ retain greater voting control.
The independence in control by Larry, Sergey, and Eric was likely crucial towards Google’s phenomenal success when they were involved in running the company. Now, these owners with controlling interest are in absentia.
The named execs running the company don’t have such a level of control. Neither do they have the type of incentives created by a $1 salary, a non-trivial ownership, and an unbounded timeline. Instead the execs need to prove themselves every 2 years. This is a stark deviation from the long term as defined in the founders letter.
So what can be done to re-calibrate the timeline for exec incentives? Let’s first rule out the most commonly suggested solution which is akin to creating throats to choke.
Carrot doesn’t work when used to hit someone with it like a stick
Many have called for cuts to compensation or other such reprimands for execs. I am not a fan of punitive solutions because they usually apply post-facto when it is too late. Or it may induce risk aversion ex-ante which is detrimental to tech innovation.
I’d even go to the extreme of suggesting that boards should consider giving executives the maximum amount of equity compensation from the start of their job. The upside in incentives should come from the stock price appreciation resulting from executives’ actions instead of bonuses. This equity compensation should have long lock-in periods of 6 years or more, limits on pace of equity sales, and clawback provisions if the executive resigns or is terminated for a valid reason. The objective should be to make executives focus on the long-term rather than just maximizing their bonuses.
In addition to executive compensation, I also have a contrarian perspective on cost efficiency and employee incentives.
Google does not need to build for efficiency
This may sound provocative. So humor me if you will.
Google has cornered the most valuable resource in the tech industry — top talent.
Many employees stay at Google for so long because of the nimbleness of always finding a role that best aligns with their aspirations & lifestage. Google enabled this by perfecting the art of hiring cognitively smart generalists, providing internal mobility, and allocating capital across a broad portfolio of efforts. This has resulted in creation of amazing products and helped maintain a bench strength of brilliant employees with crucial institutional knowledge ($200M revenue just from picking the right background shade!)
It is almost impossible to clearly project the contribution margin of such efforts in a financial model. Many of these efforts will obviously look bad from the perspective of investors always looking for a clear line of sight from costs to profits.
I believe that optimizing for efficiency would have led to missed opportunities for creating shareholder wealth. The real problem lies in how Google is failing to capture the benefits from this inefficiency.
Google of 2023: Same big calories without any of the great taste
Google’s promotion-centric culture is well-known. Promotions offer access to more visible projects and are the primary means of increasing total compensation consisting of larger equity awards. In theory, this reward system aligns well with the interests of shareholders. However, the model is plagued with skewed incentives and high agency costs
The correlation between activities that lead to promotion and those that are in the best interest of the company is believed to have weakened. Promotions across Google are also inadequately calibrated, leading to a promotion process that is now based on calculated narratives and salesmanship, rather than value-maximizing activities.
The instant liquidity of Google’s stock makes equity compensation effectively equivalent to cash, limiting its ability to align incentives with those of shareholders. There is more incentive to maximize the number of shares awarded than to focus on increasing the value of each awarded share. Promotions provide a clearer path to the former, while the latter is perceived to be beyond the control of any individual.
These agency costs have resulted in a poor rate of capturing benefits from Google’s deliberate inefficiencies making them the top target of Google’s investors. And, this all ties back to our original question of what Google employees can do about layoffs. It’s relevant, so keep reading.
Why an “Employee Owned Google” is the right solution?
It comes down to aligning the incentives along with shared expectations. Artifacts such as the 2004 owner’s manual provide a baseline for shared expectations on principles such as mutual welfare, social positivity, risk-return tolerance, and time periods for value creation. A corporate structure rooted in employee ownership provides the ongoing balance to preserve this baseline.
Employee ownership fosters a sense of mutualism among all key stakeholders, including executives, the board, employees, and investors. It links employees’ wealth into the business for a longer term, aligning them with investor interests. Additionally, it gives employees influence over boards and executives to prevent them from being swayed by short-term oriented investors. It generates a healthy tension between employee-owners and well-meaning outside investors.
Imagine if a substantial portion of the wealth of all VPs was locked into Google, how would their decision making change? What would be their attitude towards a promotion process driven by salesmanship? What would be their stance towards layoffs decoupled from the growth narrative? How would they prioritize fixing the buildup of cultural baggage or the need for ongoing performance management?
What if employees had their wealth tied to Google for an extended period of time. Would they continue to make decisions based on their own self-interest? Would their peers accept actions driven by individual self-interest? How many would still complain about the elimination of a $500 holiday gift?
I truly believe that all Google employees, executives, board members, and investors are well-intentioned individuals. However, incentives do play a role in shaping the thousands of micro-decisions people make unconsciously. Employee ownership shifts the foundation of these micro-decisions.
But with all that stock based compensation, isn’t Google already employee owned?
The two most important dimensions of Employee-Ownership are:
- Sharing controlling interest with employees — usually limited to most crucial decisions such as layoffs
- Sharing economic interest with employees — usually structured to promote long-term value creation ensuring alignment with outside investors
Google’s current system of compensating employees and executives with stock does not meet these standards. The stock given has no voting power and its instant liquidity reduces the appeal of value accretion over a long-term. The reward structures for both execs and employees are anchored in a 2 to 3 year timeframe.
With Google’s profitability, current assets, and top of the industry payscale, it has everything it needs to adopt a more formal employee-ownership structure.
There are three common types of Employee-Ownership structures in the US: worker cooperatives, employee stock ownership plans, and employee ownership trusts. Google may need to create a unique plan that fits their needs. For this discussion, I’ll assume that Google will design some type of custodian account to hold stock on behalf of each individual employee. I’ll refer to this as an EO account from this point forward.
Following are a few directional thoughts on how Google can share more broad based control and economic interest:
- 50% or more of equity compensation for named-execs and Director+ should be required to be held in the EO account
- L7 or lower employees should have the option to choose how much of their equity compensation to put in the EO account. If the EO account is structured as a tax advantaged account, it can encourage employee participation; otherwise, Google can offer a bonus for EO account contributions
- Equity compensation in the EO account should be in the form of voting Class A stock instead of non-voting Class C stock
- Whenever Class B stock is available for sale, the EO account should have the first opportunity to buy by selling Class A stock
- Holdings in the EO account should have a minimum lock-in period of 6+ years and execs should have limits on withdrawal rates over time
The above points are just a starting guide for how Google can increase employee ownership. This kind of ownership will give employees more control over important decisions like layoffs and make them better aligned with the goals of the company’s shareholders.
I am confident that Google has many talented individuals who can perfect this plan. Currently, my focus is on helping small and medium businesses adopt employee ownership.
Come help us build the easy button for employee ownership
The employee-ownership model has proven to be successful across geographies, time-periods, and industry verticals. There is a strong latent demand from 3 million business owners who are over 55 and struggle to sell their profitable businesses. Employee ownership provides these owners with a way to cash out while also offering wealth-building opportunities to employees.
However, the adoption of employee ownership is hindered by a lack of awareness among advisors and the need for bespoke consulting for implementation. This leads to friction, unpredictability, lack of transparency and high costs for business owners to implement employee ownership.
My cofounder Sonali Kothari and I are working to make employee ownership more accessible by developing SaaS and copilot tools. We’ll bring the SMB, MnA, and advisor communities together. Our closest proxies are: TurboTax, AngelList, and Carta.
If this resonates with you, please get in touch with us to help us create an “easy button” for employee ownership. We respond to each and every message.
Comment & Share
Please share your thoughts on employee ownership in the comments. Or you can also engage with us on Twitter
Appendix
Want to know more about Employee Ownership?
The book Create Amazing provides a good primer on Employee Ownership. The author, Greg Graves, was the CEO of 100% employee-owned Burns McDonnell Engineering. Available in various formats, including audio book, at public libraries in the bay area: Mountain View | Palo Alto | Santa Clara
The concept of employee-ownership of companies has existed for many centuries. Even today, employee-ownership is getting strong support from Federal and State governments. You may even be doing business with companies that are employee-owned without you realizing it.
Below is a small sample of companies that are 100% employee-owned:
