Google Reprices Employee Stock Options

Workers Cheer, Investors Jeer At Bold Move; Other Companies May Follow Google's Lead

(AP)  Google Inc. is showing its love for its employees by giving them a second chance to profit from their wilting stock options. But the move irked shareholders still stuck with agonizing losses on their investments.

Nevertheless, Google's willingness to reset more than 8 million stock options at lower prices is likely to spur similar gestures by companies hoping to motivate their employees during a demoralizing recession.

"There is a lot of momentum building" to reprice stock options, said Alexander Cwirko-Godycki, a research manager for executive compensation specialist Equilar. "Everyone has just been sort of waiting for a big name to do it."

Google already has been joined by coffee chain Starbucks Corp., which unveiled a proposal to allow its employees to swap their existing stock options for new ones that will be more likely to put cash in their pockets.

But Google's repricing program made a bigger splash because it's far more generous to the employees — much to the dismay of the shareholders who have seen their holdings in the Internet search leader plunge by 57 percent, or a collective $130 billion, since the stock peaked at $747 per share in 2007.

Google shares surged $18.20, or nearly 6 percent, to close Friday at $324.70 as investors cheered the company's fourth-quarter earnings report. But analysts said the rally probably would have been even more robust if not for the decision to reprice the stock options.

"A lot of people just hate it," said Broadpoint AmTech analyst Rob Sanderson. "I had one money manager tell me, `The next time you talk to Google's management, tell them I want all the stock I bought at $400 a few months ago to be repriced at $285."'

Understanding the angst triggered by option repricing requires an explanation on how the perquisites work.

Employees at thousands of companies generally receive a bundle of stock options when they are hired, and frequently receive additional grants in subsequent years.

The options are assigned what is known as an "exercise price" — the employee's cost for cashing in the reward. This price typically equals the stock's price at the time of the grant.

The more a company's stock price rises above the option price, the higher the profit for employees. The idea is to inspire workers to put in longer hours and come up with better ideas — to increase the company's value and the employees' potential windfall.

But if a stock price plunges below the option price — a phenomenon known as being "underwater" — employees can become dejected, distracted and perhaps even tempted to entertain other job offers, especially if a large portion of the compensation comes in the form of options.

The problem of underwater options faces 72 percent of the companies in the Fortune 500, based on Equilar's analysis of average exercise prices in mid-December.

Google's work force is awash in underwater options: Nearly 17,000 employees are holding more than 8 million stock options with an exercise price of at least $400.

Those are the options likely to be exchanged in a program running from Jan. 29 through March 3. The new options are expected to have an exercise price tied to the market value of Google's stock in early March.

Even though the repricing will result in $460 million in accounting charges, Google reasoned the cost is acceptable, to avoid morale and retention problems among its 20,222 workers. Since its inception in 1998, Google has given options to virtually all of its employees, turning thousands of them into multimillionaires.

"We think it's a good deal for shareholders and for our employees as well," Google Chief Executive Eric Schmidt said Thursday.

Even though it has been cutting back on some perks, Google is still renowned for pampering employees — a trait that isn't widely shared. That's why Sanderson isn't convinced Google's repricing will cause other companies to follow suit.

"Google gives away free lunches to employees, but that didn't compel everyone else to do it," he said.

Did Google even need to be so magnanimous at a time when many people are simply happy to have a job?

"While we agree with management that it is in shareholders' interests to keep Google employees motivated and retain the company's focus on growth, we question the necessity of the (repricing) program given the current employment environment," ThinkEquity analyst William Morrison wrote in a research report.

On the flip side, it could still be smart business to feel make workers feel wanted — even as millions of other people are unemployed.

"The reality is that talented people will always be able to find another job in any market," Sanderson said. "And if you lose your intellectual capital, you could be losing the future of the company."

Hoping to hold on to its employees, Google is extending the vesting period for each swapped option by a full year. Vesting refers to the time that must lapse before an option can be exercised. So a Google employee with an underwater option that vests in June 2010 would have to wait until June 2011 to exercise a repriced option.

Sanderson and Morrison both agree that Google could have lessened the backlash against its repricing by coming up with a program that didn't sting its shareholders as much.

Besides raising issues of fairness, Google's program threatens to lower future earnings per share by creating the need to issue more outstanding stock when the options are cashed in.

Google could have lessened the dilution experienced by its shareholders if it required employees to exchange anywhere from four to 10 of their current options for a repriced option. Or they could have traded for a share of restricted stock that would vest over several years.

It will probably take a few years before any definitive conclusions can be made about the wisdom of Google's repricing, said Collins Stewart analyst Sandeep Aggarwal.

"If it turns out to be good for Google in the long run," he said, "then it will be good for shareholders too."

[incog-nito]

Posted by anon00 at 06:59 AM : Jan 24, 2009

You''ve said it very well. The bulk of stock options go to top executives, with scraps going to the rest. Stock options nowadays are no more than a way for the big wigs to pay themselves at the expense of stockholders.

[itgranny]

While I can sympathize with the stock holders, I need to also think that it''s rather refreshing that Google is standing by their employees rather than favoring the stockholders. We''ve been living in a culture where we''ve prioritized the armchair investor rather than the guy busting their rears. Google''s approach may be going against the grain of tradition, but i have to like their efforts better than Microsoft''s, which is to put 5000 people out of work to please their investors.

[birdyard1]

the more I learn about Google , the more I dislike them

[smurfcrusher]

"Stock options should be outlawed. They dilute the value of the underlying stock for people who pay money for them."

Posted by incog-nito

...or, stock options motivate the people to offer value to their customers, acting as a boon for all the people who own stock, and working to motivate employees.

Or maybe you think Google is a little mom and pop shop?

It''s the employees that made Google great. Try *** the employees and see what happens to the company.

[incog-nito]

Stock options should be outlawed. They dilute the value of the underlying stock for people who pay money for them.

[whitemale08]

Google is just another PONZI scam.

Unless we put the financial system i.e. Federal Reserve System into bankruptcy re-organiztion, then all of these Wall Street created companies are PONZI schemes.

These companies shouldn''t be trusted because the entire global financial system as been infested by a bunch of maggots called the British East India Company Financial Empire.

Our whole system is based upon this PONZI finance garbage of credit-default-swaps and over a quadrillion in worthless derivatives.

The banks that make up the Federal Reserve underwrite the IPO''s of companies like Google based on their assumption that their profits and revenue streams are forever and without end.

The British were good for constructing "centers of authority" like Moody''s, Standard and Poors to certify this myth of never ending profits so it legitimize their PONZI financial system

Unless we understand this very fact and understand where it originates then we have no hope.