Google’s choice: Employees or Wall Street by Seth Weintraub @FortuneMagazine April 18, 2011, 11:57 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Employees. Google GOOG stock took a huge hit last week following its earnings call, dropping and incredible 47 points or 8.26% from closing the day before. That’s $15B in market cap and its biggest one day loss since the 2008 Bear market. Google surpassed revenue expectations by a significant margin and missed consensus EPS by mere pennies, so why did the stock get hit so badly? Cowan’s Jim Friedland notes, Google’s Q1:11 revenues exceeded expectations. However, EBITDA and EPS were slightly below consensus estimates due to a previously announced ramp in headcount, a 10% salary increase, and a jump in marketing to acquire Chrome users and new advertisers. Wall St. was expecting a 8.10-8.13 EPS number. Google could only muster 8.08, which was less than 1% off. $15 Billion in Market Cap gone. What’s going into this thinking? Let’s consider those Chrome marketing costs mentioned above to be negligible in their own right, perhaps in the double digit millions at most. It appears that most of the rest of Google’s rising expeses went to employees as a one time bonus, as a 10% salary increase across the board and hiring of additional 1600 more workers which will continue to grow throughout the year. If Google raised employee wages by fewer percentage points, it meets/exceeds its EPS even though its costs still increased. How would the market have reacted to that? The prevailing opinion seems to suggest that Google’s numbers aren’t completely at fault but instead the way Google talked to Wall St. was the issue. In a rare downgrade of Google’s stock, Citi analyst Mark Mahaney cited the “token appearance” by Page as being among the negative points from the company’s quarter. “We would have wanted Larry to stick around for Q&A,” Mahaney wrote in a note to investors on Friday. Remember, Google is the company who upset Wall St. to no end with their Dutch auction IPO in 2004. The company has never been terribly close to investment bankers. The Page administration didn’t do itself any favors by ridding itself of Jonathan Rosenberg, who was normally on earnings calls and has a good rapport with analysts. Via WSJ:Page's lack of concern for investor relations isn't unprecedented. But who is more important to Google’s long term success? Wall St. or its employees? Larry Page seems more focused on keeping employees happy…and keeping employees. While the current lower stock price aren’t going to be an incentive for current employees who want to cash out, a lower stock price combined with long term potential upside may be the kind of enticement that new entrepreneurial employees crave. Meanwhile every employee across the board is getting paid significantly more than before and Google’s employee compensation is much more competitive. That has to do wonderful things for moral inside the company – knowing that the leadership is willing to take a significant stock hit so that every employee has some extra money to spend. Did Page & Co. know their spending decisions would have a negative affect on the stock price? Perhaps. Last week, Page unloaded a chunk of Google stock. In fact, many of Google’s execs including the outgoing Schmidt and Rosenberg dropped some shares over the course of the quarter, perhaps preparing for a long fight with Wall St. That leads to executive compensation. Nobody lost more on GOOG’s loss than Larry Page, but as founder of the company, he is already financially set for many lifetimes. In general, founders of companies are insulated from thinking about investors as much as for hire CEOs whose compensation is usually directly related to stock performance. Founders can think long term to execute their vision without having to worry about getting fired for an off quarter or two. Still, the move to reward employees rather than investors at large, seems to have its upsides. Google is just as, if not more capable of hiring and keeping talented employees which helps its long term chances of success. Unfortunately, putting the employee above the investor seems to be an idea lost on Corporate America lately.