Stealing From Shareholders By Resetting Stock Option Prices

January 24, 2009 by Douglas A. McIntyre

SunsetGoogle (GOOG) made the decision to reset the prices on some of its employee stock options. As the company works to retain employees it make sense. Options set at $500 may not do Google any good, ever. Workers who have seen part of their compensation devalued may leave. Google will not get cash when employees turn in options for stock and then sell that stock in the open market to make money..

Google shares trade at $325.  A lengthy recession and slowing growth at the search company could pressure its stock for years.

Google will have to take a non-cash charge for the resetting.. Giving people options at lower prices is considered extra "compensation". Google argues this is a small price to pay for retaining valuable talent. If enough key people leave, the stock price could drop even more

The announcement by Google made a number of shareholders unhappy. The price at which they bought their stock will not be "reset". Individuals and institutions which picked up their holdings over the last 18 months almost certainly hold them at a loss.

According to the AP, other companies may take the same path that Google has. "There is a lot of momentum building" to reprice stock options, said Alexander Cwirko-Godycki, a research manager for executive compensation specialist Equilar.

There is another, more obvious solution to the problem which is rarely discussed. Google has about $16 billion in cash on its balance sheet. It generates an extra $2 billion more per quarter. With its large profit margins it is safe to say that the search company will not need that cash for operations. Whether it will need that money for acquisitions in the future is a matter for speculation. Worker retention probably holds a higher value than buying new companies and Google is not likely to need $10 billion in cash to pick up another firm anytime soon.

For employees, cash compensation is just as good as options. In theory, giving out cash hurts shareholders as much as repricing options, but that assumes, at least to some extent, that the cash is essential to Google’s future. It almost certainly is not.

Google does not have to hand employees a check for the difference between the current share price and the lower price of reset options. It could certainly spread the compensation over two or three years and pay it out based on earnings and individual employee performance. At least shareholders could look at those incentives as having tangible value.

Douglas A. McIntyre