It is true. I’ve hired good engineers and lost good engineers simply because one job was ‘cooler’ than a different one. Engineers think a cool job is one where there is a big challenge that the engineer thinks he can make a big impact by solving. Pay is not nearly the first consideration (of course within reason).

If you break this down into practice, it can yield to some excellent results in hiring the best engineers in the market. Here’s the short answer:
1. Make sure that you clearly state the ‘major problem’ that is needed to be solved in your engineering department (Engineers like problems).
2. Make sure that during the interview, if this is a hot candidate, you mention how the person who solves this problem will be a hero and make a big impact.
3. To keep your engineers, keep giving them problems and letting them solve them! (not as easy as it sounds!).

In practice, I’ve been able to hire 5 or 6 engineers with superior qualifications and credentials (heck even the author of some Linux Books), and all at normal pay rates (maybe even a bit low). Then, to keep them around, I keep letting them solve the tough problems. (even though I want to stick my own engineering head into them sometimes, I try very hard not to!).

I only lost 1 engineer (out of maybe 25 that I’ve hired), to a “cooler job”. My only explanation to myself on that one was: I didn’t give him hard enough problems… in fact, in retrospect, I realize I should have given him “bigger” harder problems… but hey, can’t keep them all.