Google Offers Innovative Stock Option Scheme

PreacherTom writes "In a bid to breathe new life into scandal-tainted stock options, Google plans to give employees a novel method of cashing in their options. The search giant will let employees sell their vested stock options to selected financial institutions in an auction marketplace it's setting up with Morgan Stanley. In the last year, employees and employers have been 'punished' by the IRS with new rules requiring options to show up as an expense on the bottom line. This has caused companies to tone down the granting of options. Google's move could once more significantly change compensation for employees in many industries, including tech." The new plan is intended only for Google employees, not executives. Google's motive is not saving money but rather continuing to retain employees with stock incentives in the face of considerable price volatility.

Comments

Or, you know...

[TheGreek]

...maybe they could just pay them more.

Re:Or, you know...

[nelsonal]

Well essentially they are, as most people under value their stock options. In Google's case viewing a 2 year option at intrinsic value is a substantial undervaluation. To give you some idea an option with a strike price of $600 (well above that of any employee stock options) is worth about $70/share, but good luck convincing the employees who got a grant with a strike of $500 or more.

Re:Or, you know...

[flagg9483]

"...maybe they could just pay them more." But then you're missing the whole point on incentive based compensation. Giving stock options provides an incentive to work harder and improve the performance of the company. If you've ever been a manager you'd know that giving the same old raise every year does little to motivate employees, but when workers see a direct correlation between their effort and organization performance they can become great employees and have higher job satisfaction.

Re:Or, you know...

[Timesprout]

You obviously have never heard of Enron, you know that company that lavished share options on its management and employees to the point where maintaining the share price of the company at the expense of all other activities became the overriding goal of the organisation (it did not turn well for anyone in case you didn't know).

Re:Or, you know...

[archen]

I'd think it could also backfire and be demoralizing. Lets say I work for Microsoft as an example and they give me stock options. I bust my ass to try to make the company advance, but the endless amounts of red tape and BS is obviously choking the company and there's nothing I can do about it. Instead of at least getting a raise, I have a bunch of stock that is going no where and there's nothing I can do about it.

Stock options worked great for the MS of old, but not so great as the current MS. Basically I'd think it comes down to 'when it's good it works, when its bad it may contribute to breaking stuff even worse'

Re:Or, you know...

[xenocide2]

I'm a bit confused. The going rate for Google stock is currently 500 dollars. You're saying an option with a strike price 100 dollars over that is worth nearly 70? Am I missing something, like the options expire two years from today?

Re:Or, you know...

[$pearhead]

Yes, but the correlation between individual effort and organization performance also decreases with the size of the organization.

Re:Or, you know...

[flagg9483]

You obviously didn't read the article. The whole point of the Google plan is that it provides employees an opportunity to cash in the value of option and opt out of the equity investment should they so desire. It also still gives them the chance to hold company stock if they want to take the investment risk which is what Google would like. As a Chartered Accountant and auditor I'm quite familiar with Enron and the impact its had on my industry. In the Enron collapse there were two main problem caused by stock options. First, at Enron, executives who had significant share holdings were motivated to increase their own personal wealth at the expense of shareholders and employees. As the article states, this is for employees and not executives, so it shouldn't interfere with management's stewardship function. Second, employees lost money because they didnt properly diversify their portfolio's and because the proper regulations weren't in place to allow and insure investment risks were mitigated. The Google plan mitigates the risk of employees holding too much of the company's stock by providing them a quick cash alternative. It looks very much like Google is sacrificing some of the benefit of traditional incentive based compensation by giving employees an escape route. Employees win.

Re:Or, you know...

[somersault]

Ooh, a palindrome ID :o

Re:Or, you know...

[Anonymous Coward]

Giving stock options provides an incentive to work harder and improve the performance of the company.

unless the company is crazy enough to issue put options.

That would certainly be innovative, but not really smart.

Re:Or, you know...

[nelsonal]

Yeah an option to buy the stock $100 over the current price expiring 2 years from today is worth $70/share.

Re:Or, you know...

[aminorex]

Please explain to me how executives holding shares can increase the value of their own shares while acting against the interests of other shareholders.

Re:Or, you know...

[flagg9483]

They can do so because of the information asymmetry between management and other shareholders. In Enron's case the management was hiding debt in special purpose entities. This artificially increased the share price above what it should have been. The market didn't know this, but Enron executives did, so they were able to sell early before the stock price crashed completely. They were also receiving some non-stock based compensation. In effect, because the stock price and earnings were high (artificially of course) management received cash bonuses that otherwise shouldn't have been paid.

Re:Or, you know...

[Discopete]

You are mistaking standard equity options with Employee Compensation Stock Plan Options.

Compensation Plan Options are not normally transferrable and are nothing more than a contact between the optionee and the company in which the company is willing to sell the optionee shares at a fixed price for 'X' number of years. The stock to back this option comes directly from the companys treasury, not the functional open market. Thus a Compensation Stock option is barely worth the paper it's printed on (assuming there's even paper) until the Option is 'Exercised' and the stock purchased.

This is going to be an administrative nightmare for Google, not to mention the Tax issues that an optionee will have to go through on a year when they 'sell' the option grant to another person.
As far as I know, there really isn't anything in the IRS code that deals with transfer of Compensation Options between persons expect in cases of Death, even then the standard procedure is to exercise the option, sell the shares and transfer the resulting cash to the estate of the deceased, taxing it as if it were an inheritance (sort of).

Re:Or, you know...

[prestonmcafee]

Actually, a Jan '09 option with a strike price of $600 was worth $57.50 at the close today, but it did fall $11 today. See

http://finance.yahoo.com/q/op?s=GOOG&m=2009-01

Re:Or, you know...

[tehcyder]

Yes, but the correlation between individual effort and organization performance also decreases with the size of the organization.

You mean that the correlation decreases as the size increases I assume.

Re:Or, you know...

[$pearhead]

Correctomundo! Sometimes (most times?) my fingers are faster than my mind ...

the rich play, the poor pay

[Anonymous Coward]

the more some are overpaid, the more others must be underpaid

for every excessively wealthy parasite, there are dozens of destitutes

Tax avoidance is innovation now?

[Timesprout]

Well everything Google does is innovative round here i guess. I thought the main reason stock options were out of favour was too many people took them in lieu of full salaries back in the boom days and ended up with nada after working their testicles off.

Re:Tax avoidance is innovation now?

[bmac83]

No, stock options are out of favor because they have previously provided an excellent way to compensate employees without such a huge negative impact on the income statement. As public scrutiny and regulations tighten, the bad behaviors of various companies are coming to light.

This really is a big deal. Normally, your employee stock options are tied to you and cannot be sold. Since you have less "options," the value of these to employees is quite a bit less than normal stock options to normal investors. These limits are in place for a reason: you want to exercise the options as late as possible to capture the maximum benefit (especially when you predict the company will do great in the future), and you can't exercise if you quit your job and walk away without those limited options.

Giving up on stock options because they didn't make people money for a period of time would be irrational. The whole point of stock options is to provide incentive to employees to stay at the company (to be able to exercise, or even just to receive more options) and to work really hard so the company does well. While employees who worked for stock options during that time were victims of an economic swing, options did no more than what they were supposed to do: employees of the ultimately successful companies became rich just as they imagined when they accepted such a job offer.

And, if you read the article, you will see this quote:

But it does offer a different--and possibly more accurate--way to value stock options, an area of great debate even now, nearly a year after options were required to be logged as expenses on a company's books.

This is not about tax avoidance. It's about providing attractive compensation to employees. Google may actually over-report compensation expense due to the increased value and precision of these options.

Re:Tax avoidance is innovation now?

[afabbro]

The reason stock options are out of favor is that companies have to expense them now...

i can see i t now

[jrwr00]

if i was a Google employee, i would just give the money i got from the stock, to some Fight the AIDS camplan..

Nobody is punished

[nuggz]

sheesh
the last year, employees and employers have been 'punished' by the IRS with new rules requiring options to show up as an expense on the bottom line.

Stock options are an expense and should be accounted for.
Google is trading at $480/share today. If Google issues 1 new share, the value of that share is $480. If this new share is traded for $480 there is no loss of value.
If Google gives away this share for less than $480 they are basically losing that extra money. Forcing a company to record this lost money is entirely appropriate. There is no punishment, it just creates a more realistic view of the companies finances.

As for options vs stock the valuation is slightly more complicated, but still well documented and understood.

Re:Nobody is punished

[nelsonal]

The trick is the company has to expense them at let's say $x, but the employee views them as having value of 0.05*x or so, and they make far less effective payment currency. Google's move is aimed at narrowing that gap.

Re:Nobody is punished

[UbuntuDupe]

As for options vs stock the valuation is slightly more complicated, but still well documented and understood.

"Stuck on a desert island? Assume a survival kit!"

The options vs stock is the very heart of the matter, and it is most certainly not well-documented and understood. The difficulty is that, even though the option, if sold on the market, had positive value, but the stock may fall in price, meaning the option is never redeemed for cash. So, it's an expense ... you never paid. Now, I agree that nevertheless it should be regarded as an expense, but it's far from a simple matter! Intelligent financial experts have long disagreed about this.

Also, as I 've said before, the real scandal is not stock options, which at worst, is overcompensation of employees and overstatement of tax liability, but rather the whole pension-accounting system that has allowed defined-benefit plans to underfund their obligations, and screw retirees and potentially taxpayers if this breaks the PBGC (Pension Benefit Guarantee Corporation). I mean, defined benefit plans are ridiculous in the first place, but the accounting problems there could actually screw retirees and significantly revise the net book value of several large old companies, like GM, which would have negative net book value if it actually treated these obligations like bonds.

Re:Nobody is punished

[nelsonal]

I don't know of too many financial experts (who are really disinterested) who can make a credible claim that binomial option modeling is massively incorrect on the value of the options granted. I wish companies would have granted tradable options which would have made the whole problem disappear (just use the market price for them). I agree though that the accounting for DB pensions is a much larger issue. I find it more than a little ironic that some of the biggest losers in the overcompensation of employees option issue were the DB plans themselves (who were the owners of the companies that were overcompensating the employees).

Re:Nobody is punished

[Anonymous Coward]

Stock options are an expense and should be accounted for.

Ummmm ... no ... EXERCISED stock options may be an expense but even then, it's purely balance sheet shuffling, and in the end it has a positive effect on cash flow. If an option is never exercised, it is NOT an expense. At worst, it's a potential liability. Regardless, this SEC bullshit along with Sarbox is the reason why virtually all new companies are choosing to list their IPOs in the EU. Assenine regulations like this will only serve to hurry the economic decline of this country. Here's a link echoing the story I hear over and over again.

Re:Nobody is punished

[UbuntuDupe]

I don't know of too many financial experts (who are really disinterested) who can make a credible claim that binomial option modeling is massively incorrect on the value of the options granted

I wasn't saying that there's dispute on the market value of the options, but rather, whether the option's value should be put as an expense on the balance sheet before it's ever realized (and given that it might never be realized). There are reasonable people who don't think it should be.

Re:Nobody is punished

[nelsonal]

I agree, but would rather see the argument shift toward moving balance sheets to better reflect the current exposure of all implied derivatives (like the pension example too) rather than continuing to ignore them catagorically.

Re:Nobody is punished

[Anonymous Coward]

In the last year, employees and employers have been 'punished' by the IRS with new rules requiring options to show up as an expense on the bottom line. And the IRS isn't the one doing the punishing. The IRS deals with tax matters--the "bottom line" the article discusses is an accounting matter. The income statement showing employee stock option expenses that the public will see in the annual report is only distantly related to the taxable income number that the IRS concerns itself with. I think the FASB/PCAOB are the ones doing the "punishing" here.

But I agree. It isn't so much a punishment as a more accurate representation of compensation given to employees.

Re:Nobody is punished

[UbuntuDupe]

I agree with you there. And that all levels of government should explicitly represent future entitlement obligation. My point was just that the issue is more complicated than the GGG(G?)P was making it out to be.

Re:Nobody is punished

[nuggz]

Options do have a current value.
If I get a paycheck in $, options, use of a company car or gold bars it doesn't matter.
I should claim all as income, and the company should account for them as a salary expense, the form shouldn't matter.

Re:Nobody is punished

[larkost]

I agree with you in general principal, but options but a lot of head scratching into what the value is. Here is the basic problem:

When a company grants someone an option, they are giving that person the right to purchase a set amount of stock (from the stock that the company still owns) at a set price (usually tied to the the price of the stock at the close of the market on the day that the option is granted). There are usually then rules associated with the option about when they can exercise the option (use the option to buy stock), and how long they have to hold the stock after purchase before selling it (making money with it).

So if Company A grants 100 options to Bob Smith at $5 less than today's price (lets say $45) without any restrictions, then Bob can instantly pay $4,000 of his own money to buy all of the options he is entitled to, and then turn around and sell the stock to someone else for $4,500 (market value). In this case Bob has gotten $500 extra out of the deal (minus short-term capital investment taxes), and the company has traded $4,500 worth of stock for $4,000 of Bob's money. The $500 that seems to be missing from this equation comes from whomever buys the stock from Bob. In this case it is fairly clear that the company should expense $500, since they got $500 less from selling to Bob then they would have on the regular market.

If we look at the same example, but say that the option had a one month holding time (meaning that Bob has to hold the stock for one month before selling it), and during that month the stock goes to $80 a share, and Bob immediately sells, then the math is a bit less sure. Should the company expense the $500 that it could have made at the beginning, or the $4,000 that Bob has made out of the deal?

And in a third example: what if Bob does not instantly cash in the option, but waits and in that time the stock drops to $35 a share. In this case it does not make any sense for Bob to spend $40 a share to get what he can get for $35 a share elsewhere, so he never uses the option. Should the company have some sort of expense for this? Remember, nothing but a promise to offer to sell at a specific price has ever changed hands. In this case Bob neither gains nor looses money.

And there are a lot more examples, and we have not even brought up the subject of back-dataing, which opens things up wide for abuse. (note: back-dataing has a few places where it is relevant, such as when a company promises options, but then does not get around to the actual granting for a while... this is a grey area).

Re:Nobody is punished

[nelsonal]

The IRS waits until the options are exercised and considers the expense to be the difference between exercise price and market. However, options are essentially they way we value the chance that the stock will go up or down (and as such they have value above and beyond their exercisable value) and that value should be expensed (as the company gave it to you in exchange for your performance. Essentially there are relationships based on how volatile a stock is expected to be that have a huge impact on the option's value (for that reason options on Google's stock are worth more than options on say Anheuser-Busch's).
Normally when a liability is created that has an unknown ultimate value (say a warantee or loan performance) managment makes a good faith estimate of the cost and then adjustes their estimate for actual results. Somehow in the case of employee options the method was to ignore them.

Re:Nobody is punished

[tehcyder]

I mean, defined benefit plans are ridiculous in the first place

Says who? I'd say that a pension scheme without defined benefits is pretty ridiculous from the point of view of the potential pensioner. What's the point in saving x% of your income each year and ending up with less than if you'd just stuck the cash in a savings account?

Re:Nobody is punished

[UbuntuDupe]

LOL, small misunderstanding. I wasn't saying that "companies should offer pensions but not tell you what the value is". I mean, the whole idea of a company promising a fixed annuity based on pay an years of service is stupid. They can never know how much to fund, so they're either

a) eventually underfunded
b) rely on new suckers, I mean employees to join them, making them effectively a Ponzi scheme
c) not under your control, so someone can raid it and leave you with no recourse (because they can't pay damages)

or some combination.

It makes much more sense to have a defined *contribution* plan, where they say how much they'll *give you* (or how much you can divert) and then you can choose how to save it, and have full ownership rights (vestiture) over the account, so that, if you want, you can "put it in a savings account".

Exactly

[AoT]

Which is why "Google's motive is not saving money but rather continuing to retain employees with stock incentives in the face of considerable price volatility." is a bunch of nonsense. Google (possibly) found a novel way to increase the salaries of their employee with out having to pay them more.

There isn't anything wrong with saving money, especially when it can be done in a way that benefits the company and the employee.

Re:Exactly

[durdur]

It also allows them to get some benefit even from options that are at their strike price or below. It is certainly innovative, but fundamentally I think this is also a way to persuade employees to sign on to or continue in jobs that will come with options priced at bubble levels. I don't think Google is going to $5000 a share anytime soon. But there are startups and early stage companies where 10x appreciation over several years is a reasonable possibility. Their challenge now is to keep people from walking away to those opportunities.

Insider Trading?

[b0nj0m0n]

If this marketplace is "semi-open", it seems to me that watchers in Morgan Stanley would get leading information on any major option exercise inside the company. What's to stop them from dumping when Google employees (presumably acting on some sort of inside info) start exercising en masse?

Fortunately, most employees suck at evaluating their employer's stock :)

Re:Insider Trading?

[planetmn]

What's to stop them from dumping when Google employees (presumably acting on some sort of inside info) start exercising en masse?

Insider information trading laws and the SEC.

My mom managed mutual funds for a living. Because of this she, and the rest of the family, was restricted in what we could do when buying and selling stock since she had access to information that the normal public didn't have. There is really no mechanism to prevent the trade (just like there is no way to truly prevent most crimes), but there is a mechanism to punish the wrong doing and (hopefully) make people less willing to partake in the crime.

-dave

Black-Scholes

[BrotherZeoff]

http://en.wikipedia.org/wiki/Black-Scholes

This is the main theoretical method for option valuation.

The formula was derived by Fischer Black and Myron Scholes and published in 1973. They built on earlier research by Edward O. Thorp, Paul Samuelson, and Robert C. Merton. The fundamental insight of Black and Scholes is that the option is implicitly priced if the stock is traded. Merton and Scholes received the 1997 Nobel Prize in Economics for this and related work; Black was ineligible, having died in 1995.

I think it's really cool what Google is doing here - get some actual values which can then be compared to the Black-Scholes values. Doesn't it seem possible that Google will be willing to auction off other firms' options as well, if this catches on?

Re:Black-Scholes

[flagg9483]

Black-Scholes will be a little complex for most employees, and perhaps even for Google's techies, although interesting from a theoretical point of view. The price available to employees will likely a simple value close to the options intrinsic value (stock price minus exercise price), plus or minus a premium determined by the bank for time value or discount for transaction costs.

Re:Black-Scholes

[ibbieta]

The formula was derived by Fischer Black and Myron Scholes and published in 1973. They built on earlier research by Edward O. Thorp, Paul Samuelson, and Robert C. Merton.

What is interesting, to me at least, is the people mentioned as providing "earlier work". Edward Thorp is probably more popularly known as the guy who wrote the first real Blackjack strategy book, "Beat the Dealer". After a short stint proving the validity of card counting strategies for Blackjack in real casinos, he went on to apply much the same mathematical reasoning to financial markets where he has had reportedly found more success.

Paul Samuelson has a much less colorful biography than Thorp but his name being included here is interesting because Samuelson's work has dealt mostly with "welfare economics" by studying and trying to apply mathematical methods to social problems/solutions. Finding his name included as helping work out the possible future values/present cost of stock options is somehow amusing to me. Some really great stuff in his work and he also wrote a very readable introductory textbook for economics.

I never looked too closely into the Black-Scholes valuation formulas but when I would read about them and their applications, I always thought the idea sounded familiar. I could have easily guessed Thorp because I read some of his financial articles and those cover much of the same ground but I would never have guessed Samuelson.

Re:Black-Scholes

[UbuntuDupe]

Actually, now that you mention it, I should add that my company matches 401k contributions, but requires you to buy company stock with the match (though not with your own contribution). You then have to hold it for ~2 years. I didn't like that. So for a while, I was seriously considering ways I could monetaize that holding so I could diversify it. One way would be to sell the shares now, with a time lag of the required holding period. Another way would be to sell the option to buy at some price at the end of the period, so I get money now. So I would want a service like that.

Luckily, next month, they're eliminating that policy, so I can sell the shares without waiting. They still automatically buy company stock with your match, you're just allowed to resell it immediately.

Re:Black-Scholes

[Bill Walker]

Yeah, what they need is to establish some kind of 'market' where dealers establish the price of options based on the aggregate demand. Oh, wait...

WOw, what a neat idea

[Xemu]

The search giant will let employees sell their vested stock options to selected financial institutions in an auction marketplace

That's pure genius! Perhaps we could have professionals bidding on this market place and call them "auction brokers" and we can then have all these professionals work in a place we call the "auction exchange". We could then allow any company that meets certain standards to hold auctions on this market place and code different company auctions with a letter code we can call "auction ticker".
Imagine the possibilities.

Re:WOw, what a neat idea

[mre5565]

You and people who modded you up are laughing because you fail to understand.

There are basically two types of options: stock option grants to employees, and derivatve options sold by options exchanges. The latter come in the form of puts and calls. A person who buys a put option is buying the right to sell 100 shares of a specified company to seller of the put at a specific price. A person who buys a call option is buying the right to buy 100 shares of a company from the option seller at a specific price. One buys a put option if he expects the price of the stock to drop. One buys a call option if he expects the price of the stock to rise. One who buys a call or put can sell it later if he wants. The call or put usually has a short life time (a few months usually), and expires if not "exercised" (i.e. the owner of the call buys the stock, and the owner of the put sells the stock).

Employee stock options are basically call options that the company has sold to the employees for zero dollars (well technically the company has bartered the options to the employee in exchange for their labor). However, employees cannot sell these options on an open market. All they can do is "exercise" (i.e. "call the option" by buying the stock from their employer). At least, not until Google.

Why would an employee want to do this? Because sometimes call option prices have built into them a future expectation of price appreciation. It is possible for the employee's call option to be sold for more than the current market value of company's stock. And with GOOG's rise over since its IPO, many buyers of GOOG call options would be willing to make that bet. An employee can thus bank GOOG's future appreciation now, and diversify now (or he can use the proceeds to buy more GOOG). Another example would be employees that have "under water" options; options that have a strike price higher than the current market value of the GOOG. Without Google's new options market for employee, such options are worthless. Whereas, with an options market, such options might be worth something, even it is just a few dollars per option. There are lots of employees of former high flyers like Sun that would be interested in such a market, because they hold options with strikes of $50 per share or more.

So this is a good, employee friendly, thing. Yes it is an obvious idea, but keep in mind that the investment industry is very conservative, and it sometimes requires people like the Google founders to question conventional approaches.

Re:WOw, what a neat idea

[LauraW]

That's pure genius! Perhaps we could have professionals bidding on this market place and call them "auction brokers" and we can then have all these professionals work in a place we call the "auction exchange".

I'm sorry, but I've patented that business method. Want to license it?

(Sorry, I couldn't resist.)

Re:WOw, what a neat idea

[vidarh]

Why would an employee want to do this? Because sometimes call option prices have built into them a future expectation of price appreciation. It is possible for the employee's call option to be sold for more than the current market value of company's stock.

That doesn't make any sense. If the cost of the option is above market price, then it would be cheaper for a purchaser to just buy the stock itself on the open market and hold it. The market value of a call option will always be lower than the market value of the share itself in an even remotely sane market for exactly that reason, unless the stock is highly illiquid (which definitively isn't the case for Google).

What you might have meant, is that the return for the employee of exercising the option might be lower than selling the option. For example, if the share price is $400 and the strike price is $250, then exercising the option would net $150 (less tax), while the option might perfectly well sell for $200 because a purchaser may bet on the share price rising so that the purchase price + strike price will dip below the share price at some point in the future.

Re:WOw, what a neat idea

[havockla]

Good luck to everyone at Google at getting a fair price on your options. Seems to me it would be smarter to let them sell the options ON an exchange where there is a competitive bidding process. Then again...i am sure there is some reason I am not aware of that it can't be done. Still...good luck, I am sure that you will have the most competitive market that is available. I am sure JP has your best interest's in mind :)

Re:WOw, what a neat idea

[aminorex]

Its also good for Google, because they can bid on the options themselves, which means they reduce the size of the float, and do so by booking treasury shares at par (usually 0.01$ or 1.00$) instead of booking them at market prices. It's also good for Google shareholders if Google is reducing the size of the float. Frankly, I think it's not brilliant but a good, sound idea, a win-win-win idea. (Assuming the employees make good decisions.)

Re:WOw, what a neat idea

[bluejay63]

I read about 50 comments and your's is the most informed. However you still have a lot to learn about options. The Google plan in my opinion is creative but not well thought out. Any employee or executive can presently hedge his options with exchange traded calls quite easily. Proper hedging will increase his return, reduce taxes and risk with the Employee getting about 50% more after tax compared to some elementary strategies promoted for mass consumption. The Google plan will merely end up by putting money in Morgan Stanley's pocket at the expense of Google and the employees. It will be interesting how it developes. Yesterday there was a drop in call and put premiums in the longer options of Google in anticipation of Morgan selling the premium to hedge its expected purchases. Cheers:

Sorry, I call BS

[Anonymous Coward]

This is complete BS. The reason why companies should be expensing stock options is because they are essentially giving away value to employees. When you give something away like that, its called an EXPENSE! I hope that Google gets slammed by the IRS. These guys have grown arrogant in their thinking.

Re:Sorry, I call BS

[Joe Decker]

I'm not sure I understand your dismissal. It sounds to me like Google is not trying to avoid expensing options. It sounds to me like Google is using the method they're proposing, much as Coca-Cola already does, do determine a fair market price for the options, a step which makes the determination of the value of the expense to be included on their books a lot more direct. So, where's your beef?

Nice try google...

[danpsmith]

Google's move could once more significantly change compensation for employees in many industries, including tech.

Nice try Google, I mean you can try to change compensation for tech employees but in the end, as the saying goes: The bubble-era vision of a Utopian Internet is dented and dirty... The Lexus has collided with the olive tree, and its crumpled hulk spins in a ditch as the orchard smolders.

Re:Nice try google...

[Webs 101]

Oh, I wish I hadn't used up my mod points last night. That comment deserves +17 for funny and for recursive.

Comment removed

[account_deleted]

Comment removed based on user account deletion

The employees still lose...

[madhatter256]

Giving them the option to sell the stock publicly is alright. However, it is still an unsecure benefit. Companies today are giving their employees more riskier benefits. Its like giving lottery tickets as a christmas gift. This stock option is similar to that. What if now Googles stock starts to drop and stays well below the price it is now? Then the employees have lost a lot of money in that investment and end up selling at a low price to institutions like Morgan Stanley, etc. Who can then turn around and demand employee layoffs with the low stock price and threaten takeover if those instutions have a controlling stake in the company.

  This is a growing trend for companies nowadays, where they give their employees less benefits (thus decreasing company loyalty, and it is why you have rampant corporate espionage today) while execs keep giving themeselves cash-benefits and an 'fallout shelter' incase of a financial collapse of the company (ie Enron). This isn't a gift, its a slap in the face to the employee! It purely says, "hey! we're giving you the option of selling the stock if and when it starts to go down! You know what they say when stocks start dropping for a company, right? Layoffs! So, having this option is actually neccesary for when we lay you off because you will need all the money you can get from that stock to feed you family. Oh but wait, don't forget the dividends tax! Sure your all the stock you own might be worth $5,000 but with it being that small you pay a high dividend-tax when you sell thanks to Bush passing that law in 2001! Have a nice day!"

Where have ethics gone? Corporate America used to have it but it lost it somewhere in mid 90s.

Re:The employees still lose...

[Anonymous Coward]

How often does this happen?

Or, to put it another way: Can you name one time that this has happened? Google is worth $140 billion right now, and about 30% of the stock is held by insiders. So you're betting that some institution will invest $42 billion in trying to take control of the company, and they'll do it all by buying cheap employee stock options. Do you think Google has issued $42 billion worth of stock options? Do you think they'll ever issue that much?

And why is it a slap in the face for the employee's financial security to be aligned with the company's financial performance? Isn't that how more or less every job works? Stock options make it more explicit, but the usual arrangement is "We'll pay you if we do well. Or we'll fire you when we go bankrupt." Why is it insulting to give employees upside as well as downside?

Re:The employees still lose...

[nelsonal]

More importantly the insider 30% of the shares each carry 10 votes per share, so they have something like 90% of the votes.

Is this really newsworthy to this blog???

[Anonymous Coward]

How is this news for nerds or stuff that matters? Only if you are a google employee should you really care, and then you probably already know. Every little thing google does is not relevant to the readership of this blog. Why doesn't slashdot start posting on what Page and Brin ate for lunch too?

Are people drinking Kool-Aid here?

[Anonymous Coward]

"Google's motive is not saving money but rather continuing to retain employees with stock incentives in the face of considerable price volatility."

  This sounds like you are an appologist for what is Google doing. Thank you for being their bitch.

  And I am sorry, paying TAXES is not PUNISHEMENT it is a responsibility.

  Google has greatly benefit themselves from the gov't which is built from the taxes now they don't want to pay back, and find novel ways to "have their cake and eat it too"

Microsoft did the same thing a couple of years ago

[donutello]

This has nothing to do with tax avoidance. Microsoft's plan had more to do with underwater options but it was basically the same thing. An option that is underwater has no current value but does have value in the marketplace. Microsoft allowed employees to sell their underwater options for their market value. The difference was MS's plan was limited to underwater options and was a one-time all-or-nothing deal.

It's all about the margin call

[Anonymous Coward]

The reason this is cool is that currently the value that an employee has in vested stock options can't be easily hedged (i.e. locked-down) because selling options is a lot more complicates than buying them. Selling an option has the same complications as shorting a stock, credit issued and resultant margin calls. If I wanted to sell a vested option with an exercise date a year from now I would be at risk of having to post huge collateral should the stock run. Delta-hedging like the big guys do is impractical for the average joe.

The implied beauty of Google's system is that Google would guarantee that the seller actually already owned the option they were selling. Then Google would effectively buy the option back form the employee, and sell it to the buyer. The buyer's credit risk would now be only to Google, and minimal at that, because if the stock ran Google would be doing well.

Corporate ethics were never really there....

[Anonymous Coward]

...to begin with; it was only in the last 20 years or so (but especially in the last 10) that they started paying for laws that allowed them to act how they wanted in the first place. All it takes anymore is a dollar bill and a congressman to re-define "ethics" nowadays. You can also place direct blame on the tunnel-vision focus of quarterly profits being the "end-all-be-all". Don't even get me started on the criminal underfunding of pensions and the over-glorification of the 401k.

Re:Corporate ethics were never really there....

[UbuntuDupe]

I know you're not following your posts, but I really want to hear about the over-glorification of the 401k.

Thank Reagan / Butc^W Thatcher on that one.

[sethstorm]

Where have ethics gone? Corporate America used to have it but it lost it somewhere in mid 90s.

They lost it a lot earlier thanks to Reagan. It's a lot easier to go to the bargaining table when you just gave corporations a signal that they could smite workers at will without a care in the world.

wow

[Anonymous Coward]

I want in.

Innovation?

[Anonymous Coward]

MSFT did this 3 years ago.

I just don't understand how this is useful

[iii1998]

I must clearly be missing something, but I just don't understand how this is useful. As a stock option owner myself, I am not required to keep the shares I buy when exercising options. Our stock option plan administrator allows immediate turn-around and sell, using the proceeds to finance the purchase of the discounted stock. I would think every plan allows this. Maybe that's what I am wrong about...

1) Share price > option price : Why would anyone pay more for an option than the difference in actual and discounted share price?
2) Share price option price : The options are worthless.

Re:I just don't understand how this is useful

[nelsonal]

If you truly believe that then I will take any underwater options you wish to give away (I might even surprise you with the price I'd be willing to pay).

Re:I just don't understand how this is useful

[iii1998]

Yes, I didn't think too far ahead. All is clear now. Thanks.

Re:I just don't understand how this is useful

[Anonymous Coward]

Go look up how option pricing works.

If the strike price is higher than the share price, the options will possibly still have some value, on the theory that there is some chance that the share price will rise above the strike price some time in the future.

Re:I just don't understand how this is useful

[Stuntmonkey]

I must clearly be missing something, but I just don't understand how this is useful. As a stock option owner myself, I am not required to keep the shares I buy when exercising options.

It is useful because the market value of an option is always greater than its "par value" that you would get from a cashless exercise (i.e., market price minus strike price). From what I understand regular exercises (including cashless ones) will still be permitted.

The key here is that options are a leveraged instrument. Say you have an option for 1 share of GOOG stock at a strike price of $450, and the current market price is $480. Assume an average stock returns 10%, and treat GOOG as an average stock for this purpose. Compare these two cases:

1. Exercise the option now, invest the $30 proceeds (= 480-450) in a stock index fund. In two years at 10% interest, you'll end up with $36
2. Retain the option and exercise in two years. GOOG stock goes up by 10% annually, to a market price of $581 in two years. Your cashless exercise at the end nets you $131 (= 581-450).

A downside to #2 is that you have to wait to get the money. But if you were allowed to transfer the option unexercised to someone else, they would certainly pay you quite a bit more than $30 for it. If I'm the third party, my best guess is that the option will be worth $131 in two years -- so if I paid you $90 or $100 now I would get a pretty good return. What Google is doing is creating a mechanism to allow these option transfers to happen, and a market to determine prices.

Of course not all stocks return 10% always, so this simple calculation isn't quite right -- there are corrections due to the variability of returns. But it does demonstrate the key point that a lot of the value of options stems from their leverage, and why Google might want to do this.

PBS has good online videos on this

[RealGrouchy]

PBS Frontline's 2002 documentary Bigger than Enron (watch online here) gives a good summary of how Enron and other big companies and accounting firms use stock options to fuddle-duddle their performance, and how they pay off Congress to keep it that way.

PBS has a number of other +5 Insightful documentaries that you can watch for free online, including other financial-related ones on Complicated tax shelter schemes (2004), credit card company tactics (2004), and The end of pensions by 401(k) (2006).

I strongly recommend all of their documentaries, which are supported by "viewers like you".

- RG> (not affiliated with PBS; loosely affiliated with PB&J)

Great idea!

[ml10422]

I wish my company would copy Google's example.

I had always assumed, because no company had ever done it before, that it was illegal to make employee stock options tradable.

In the money

[Anonymous Coward]

This 'punishment' of writing it up as an 'expense' is normal for "in the money" stock options... That is the currrent market price for the stock exceeds the strike price of the option. So, in other words, it is for employees who _are_ making good money on the options. Stocks traded are usually taxed under capital gains laws, depending on your jurisdiction, you might pay half or less tax as compared to the tax rate on salary.

As far as I know, in the money options have always been expenses. To think otherwise is to agree with the likes of Enron, Worldcom and others who might share a cell...

MOD parent up!!!

[nelsonal]

Only on /. does the best post on the whole board go unnoticed all day long.

Re:MOD parent up!!!

[Anonymous Coward]

Thanks,

I enjoyed watching my first Slashdot post wallow in obscurity.