Google's tab for its across-the-board raises: $400 million in 2011

Google gave all of its employees a $1,000 holiday cash bonus for 2010 and at least a 10 percent salary increase 2011. Bottom line: That raise is going to cost Google some operating margin in the fourth quarter and next year.

Google gave all of its employees a $1,000 holiday cash bonus for 2010 and at least a 10 percent salary increase 2011. Bottom line: That raise is going to cost Google some operating margin in the fourth quarter and next year.

The move, first reported by Henry Blodget, has spurred concerns about a Silicon Valley talent crunch. Indeed, Google's move appears to be at least partially designed to keep employees from jumping to Facebook. However, human resources always tells us that it's not about the money in most cases. As a manager, that fact is generally true.

So now we have Google floating more money to employees to keep them around. However, it's quite possible that employees at Google find themselves at a big outfit with a bunch of processes and want more of a startup vibe. These folks may want a shiny new object to employee them. A 10 percent raise isn't going to change that equation.

What's the financial hit to Google? In the grand scheme of Google's profit machine the fourth quarter expense is negligible. For 2011, the sum makes you gulp a bit.

Barclays Capital analyst Douglas Anmuth runs the numbers:

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 fulltime 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%.

Meanwhile, Anmuth's numbers may be too conservative. He made his calculations on full-time employees. The pay increase will go to part-timers too.

This news shouldn't be all that surprising. Google executives have hinted that employee retention has been more challenging as the company matures. Anmuth also likes the fact Google is investing in its workers. In addition, Google has warned in regulatory filings that it could take a margin hit keeping employees. The company said:

We continue to invest in systems infrastructures, increase our hiring, and adjust our compensation programs as required to manage our growth and develop and promote our products and services, and this may cause our operating margins to decrease.