Google Inc has to deal with the increasing salaries of employees and staff that could further erode strong financials if it does not make the most of advertising revenues from video and display advertising, analysts said.

Google today reported strong first quarter earnings as ad revenues jumped 27 percent to $8.58 billion for the quarter and has even beaten analyst expectations.

Nevertheless, Google's Q1 growth also tells a more structurally competitive market illustrated in its increasing allocation for salaries to retain its pool of software engineers and advertising executives.

Ovum lead media and broadcast technology analyst Mr. Adrian Drury said in a note to clients that its earnings are getting hit by a jump in its wage bill.

"Operating costs are up to $2.84 billion, a year-on-year increase of 54 percent with a major share coming from growth in its overall headcount and the 10 percent increase in salary across the board for all Google employees.

Mr Drury said talent retention is now Google's biggest challenge as competition with other venture capitalists in the industry like Facebook and Yahoo.

"As it pushes deeper into mobile, broadcast and online display advertising, engineering talent retention is going to be critical and expensive. Inflation in its wage bill is going to persist and it will need some of its bets in video and display advertising to start paying out to stabilize its operating margin," Ovum's Mr Drury noted.

More from IBT Markets:
Newsletter: To receive Global Markets update, sign up here
Forex: Get Free Forex Education Materials from our Forex Section.