Alphabet’s ‘Other Bets’ adopting new performance-based stock compensation

The goal of last year’s Alphabet re-org was to effectively turn Google’s many research divisions into startups that make profitable products and services. To better incentivize executives and employees, a new report (via Bloomberg) says that Alphabet is implementing a new type of stock compensation whose value is tied to the performance of each company.

Alphabet’s share price is still mostly tied to the performance of Google’s core businesses. For employees of bet companies, Alphabet stock often makes up half of their compensation. This provides an air of safety for those working on an ambitious project that might fail.

In theory, if a bet company’s growth outpaces the rest of Alphabet’s, employees would not see that reflected in their stock and thus be less incentivized to improve. The new plan would grant bet company stock to employees based on an independent, fair market valuation. Every six months, employees would be able to sell that company-specific stock back for cash or Alphabet equity.

This system is currently implemented at the X research lab, while executives at Verily are currently implementing it. Fiber is sticking to the old Alphabet stock compensation, while it is unknown what Nest will do. For the most part, employees are reportedly wary of this model and have tried to return to the safety of Google:

The plans have sparked concern among some employees who prefer the security of a big company, people familiar with the matter said. In the past, working on a new project entailed little risk for staff because if the effort failed, Google kept churning out profit, bolstering the value of employee stock. Now, if an Other Bet company struggles, the new form of equity could be worth considerably less for workers who get as much as half their total pay from stock, according to one of the people.

So far, Alphabet’s “Other Bets”, have yet to do very well in quarterly earnings. In one case, questions about profitability — among other reasons — likely led to the decision to replace Nest founder Tony Fadell for a more experienced growth-minded executive.