Alphabet's 'Other Bets' To Get Stock Tied To Performance

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When Alphabet Inc. was formed last year, it was believed that the separation would allow the company's other businesses to function independent of Google, both financially and structurally. Despite the separation, employees of such 'Other Bets' companies continued to draw their incentives and compensation from stock tied to Google's revenue from digital advertisements and other sources. Alphabet Inc.'s CEO Larry Page reportedly felt that this way, such companies continued to function like research divisions of a highly profitable Google, rather than fast-moving and lean start-up enterprises. To turn such companies into profitable and competitive ventures, Alphabet has decided to implement a new system of compensation and incentives which will be tied to a company's performance and not to Google's publicly traded shares. The new system will come in the form of a stock whose value will fluctuate depending on a company's performance which will be measured once in every six months.

Even though Alphabet has not publicly announced the new compensation structure, a number of employees working for its 'Other Bets' companies are either aware of it or have been privately briefed about it. Naturally, a lot of such employees are not happy with the new structure and some of them have made attempts to quit their business and re-join Google's core business. As of now, regardless of how a business performs, its employees are assured of a high return on their stock in Google and are thus less inclined or motivated to achieve their targets or increase their productivity. If the new compensation structure is implemented, their compensation would be significantly less compared to what it is now if their businesses struggle in the markets. According to Jose Benitez Cong who was a former manager at Nest, "This puts the pressure on the employees. As a motivational play, this makes sense because it removes the safety blanket. Before, employees of Other Bets companies knew that Google did pretty well and didn't need to worry about shipping products or services."

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Alphabet's decision makes a lot of sense if we consider the fact that the 'Other Bets' companies together accounted for just $448 million in revenue compared to an operating loss of a $3.6 billion in the fourth quarter of 2015. Given that many of these 'Other Bets' are new 'start-ups' and need fresh investments to function, these companies still showed an improved performance compared to the same period of previous year when they accounted for just $327 million in revenues. Despite their record losses, Alphabet as a whole recorded a revenue of $21.4 billion and a net income of $4.9 billion in Q4 of 2015. Given that the Other Bets companies, which include the likes of Google Fiber, Nest, Google X, Google Ventures and others, are expected to improve and expand with the passage of time, their future earnings may look much better than they do now. The implementation of Alphabet's new compensation structure, if it happens soon, should act as a wake up call to additional Other Bets companies as well.