Google's fight to keep its top minds

NEW YORK (CNNMoney.com) -- Google is known to hire the best and the brightest Silicon Valley has to offer, but hanging onto that talent can be a struggle. Google's bold move to boost morale -- a 10% across-the-board pay raise -- has already cost it one worker: The employee who leaked the news.

Google CEO Eric Schmidt announced the salary hike in a memo late Tuesday, a copy of which was obtained by Fortune. The memo was also leaked to Business Insider, which broke the news. Within hours, Google notified its staff that it had terminated the leaker, several sources told CNNMoney. A Google spokesman declined to comment on the issue, or on the memo.

"While we don't typically comment on internal matters, we do believe that competitive compensation plans are important to the future of the company," Google's spokesman said in a prepared statement.

In the past few weeks, Google has lost top minds such as YouTube co-founder and CEO Chad Hurley, AdMob co-founder Omar Hamoui, and Google Maps and Wave creator Lars Rasmussen.

When Rasmussen left, he told the Sydney Morning Herald that Google's growing size hindered its employees' ability to get things accomplished. Google has a headcount of nearly 25,000. Rasmussen is heading to Facebook, which has a staff of just over 2,000.

He's hardly the only one. Of the more than 1,900 Facebook employees with resumes on LinkedIn, 300 -- around 15% of Facebook's staff -- list Google as a past employer.

The company's Google alumni network goes straight to the top: Facebook's No. 2 is Sheryl Sandberg, Google's former chief of sales and operations. And in June, former Google Product Manager Bret Taylor became Facebook's chief technology officer.

So, facing both internal and external pressures, Google (GOOG, Fortune 500) made an unprecedented move to keep its employees happy and in place. Companies have been more likely in recent years to cut salaries for their entire staff than to raise them.

The problem of keeping talent is hardly Google's alone to bear. Microsoft and Yahoo (YHOO, Fortune 500) have also had heavy defections to Facebook, according to LinkedIn data. And Google has been on the beneficiary side as well, picking up a large number of former Microsoft (MSFT, Fortune 500), IBM (IBM, Fortune 500) and Yahoo employees.

"In the Valley, that's always been part of the drill," said Joel Achramowicz, analyst at Blaylock Robert Van. "Everyone's losing people to everyone. It's part of the cross-fertilization that occurs."

Analysts say Google is facing what all Silicon Valley companies struggle with when they graduate from startup status and into the realm of Big Tech.

"It's the danger of being successful," said Carl Howe, analyst at Yankee Group. "You can get away with a lot of stuff when only your reputation and a few thousand dollars are on the line, but when you threaten massive income streams, you get a bit more cautious. You don't want to lose everything you worked for."

The bureaucratic smothering Rasmussen cited in his departure has been a mounting problem at Google for several years.

Exhibit A: Dodgeball, the location-based social network that Google bought in 2005. Frustrated by Google's lack of movement on the technology, the company's founders quit just two years later, giving Google a big thumbs down. They both now work on Foursquare.

Every large company faces such challenges, though their solutions can take radically different forms. Google has been working to reorganize its structure, creating smaller teams that aim to give employees more autonomy. That's one reason why so many of Google's products are in beta. Not everything needs approval from top bosses like co-founders Larry Page and Sergei Brin.

That's very different from Apple's approach. At Apple (AAPL, Fortune 500), employees fight to get their ideas passed through many layers before they become products, with refinement and criticism at each step. Steve Jobs has the final say on essentially everything, analysts say -- and most fledgling creations die along the way.

Each approach has its benefits and drawbacks. Google's system strikes some employees as too chaotic, making it hard to get things done, according to Howe. On the flip side, zanier projects like robot cars serve an important morale-building purpose, on top of generating interesting research results. They often inspire engineers, and position the company as a cool and innovative place to work.

Like many of Silicon Valley's Goliaths, Google is sitting on a mountain of cash -- more than $33 billion as of Sept. 30. Right now, cash earns next to nothing when it's parked in conservative investments, so companies are looking for other ways to generate returns. Some are doing share buybacks, others are upping or creating dividends, and many are hunting for acqusitions.

Google likes to snap up startups, but its salary bump sends an intriguing message: The company thinks the best place to invest its cash is in its existing staff.