Google Owes You $1.5 Billion

Evil has a price: $1.5 billion.

Google's (Nasdaq: GOOG  ) options repricing plan, originally estimated to cost $460 million, has created $1.5 billion in wealth for employees who benefited from the plan, The Wall Street Journal estimates.

Anyone else sickened by this? Scandalous stock options plans are nothing new. We've seen repricing in action at eBay (Nasdaq: EBAY  ) , Williams-Sonoma (NYSE: WSM  ) , NVIDIA (Nasdaq: NVDA  ) , and MGM Mirage (NYSE: MGM  ) , among others.

But Google was supposed to be bigger than this. Google was supposed to be the company that did no evil. Sorry, Larry and Sergey, but options repricing is evil; it's a wealth transfer from shareholders to employees.

What's most galling in this case is that Google got lucky. According to the Journal report, the Big G in March exchanged 7.6 million options at an average exercise price of $522 for an equivalent number priced at $308.57. Six months later, employees who saw only a deep shade of portfolio red are now sitting on a better-than-60% gain.

Great work, Google. Good for your employees.

Now, what about the shareholders you left out in the cold? Remember, that $460 million you set aside for repricing was taken straight from equity that belonged to your investors. How will you repay them? Perhaps issue a one-time dividend?

Employees shouldn't be the only ones to benefit from your good fortune, Google. You owe your investors money, too. Pay up.

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Fool contributor Tim Beyers had stock and options positions in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy appreciates your Foolishness.


Read/Post Comments (25) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2009, at 11:28 AM, ChannelDunlap wrote:

    You fail to address the fact that treating their employees right is part of what makes Google such a successful business. This is not transferring wealth, this is furthering your investment in your talent.

    I hate this notion that the shareholder should be the #1 priority for all businesses. This is simply not the case. The people who do the work for Google are the people who deserve this money, not the people who sat back and clicked a "buy shares now" button.

  • Report this Comment On September 28, 2009, at 11:31 AM, TMFBent wrote:

    Go get 'em Tim.

    Here's the full story on just how "not evil" Google's not.

    http://www.secform4.com/insider-trading/1288776.htm

  • Report this Comment On September 28, 2009, at 11:42 AM, wolfman225 wrote:

    ChannelDunlap--

    "The people who do the work for Google are the people who deserve this money, not the people who sat back and clicked a "buy shares now" button."

    How do you figure?

    The people who work for Google presumably earn a wage/salary, as well as possible bonuses based on performance. The people who "sat back and clicked a buy shares now button", as you call them, are the ones who provide the risk capital that Google depends on for expansion.

    "Remember: That $460 million you set aside for repricing was taken straight from equity that belonged to your investors"

    The investors deserve to be compensated.

  • Report this Comment On September 28, 2009, at 11:43 AM, TMFMmbop wrote:

    I blogged about this on Friday. The picture I posted of these Smirky McSmirks will just make you angrier: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=264919&t=0...

  • Report this Comment On September 28, 2009, at 11:46 AM, ChannelDunlap wrote:

    Wolfman - I guess we see things differently. I would rather see employees, who are actually doing work, get compensated rather than investors. Especially at Google, where they're so well known for taking care of their employees. It's not like any investors actually lost money over this. "Made less" perhaps, but nobody lost money.

    But then... I am and employee who does actual work. So maybe I am a little biased.

  • Report this Comment On September 28, 2009, at 11:47 AM, lution wrote:

    Google treated its employees right when it gave them the original options. They were there to push employees to do better and if the company did well, they'd get some extra because the stock price was over the option price.

    In this case, it didn't work and the stock took a dive and made the options worthless. Guess what, if I'd a bought Google I'd a been deep in the red and wouldn't have anything other than time and patience hoping the stock would go back up.

    What Google did was give employees options originally when what they did with the reprice was give them a bonus. Just be up front about it next time and just give them a bonus that they can't collect for X years next time instead of playing a numbers game.

  • Report this Comment On September 28, 2009, at 11:56 AM, wolfman225 wrote:

    ChannelDunlap--

    I, also, am "someone who does actual work". This not-so-thinly veiled contempt (or is it envy?) for those who have more than you is counter-productive.

    Please keep in mind that without investors (aka The Rich), there would be no Google, no Amazon, no McDonalds, etc. No world-wide buisnesses that employ thousands while providing an increased standard of living for millions more. The fact that they also happen to be profitable is not a sin.

    I don't want to hijack this thread by going too far off-topic. Just wanted to give a little food for thought. While what Google did may not have been illegal, it seems to me to be more than just a little "on the shady side". JMHO

  • Report this Comment On September 28, 2009, at 12:07 PM, catoismymotor wrote:

    A wise person once said that you should never meet your idol, they can never live up to your expectations. And another said "Familiarity breeds contempt."

  • Report this Comment On September 28, 2009, at 12:27 PM, prginww wrote:

    THE ONES WHO CLAIM NOT TO BE EVIL ARE THE ONES MOST EVIL. I SHOULD KNOW!

  • Report this Comment On September 28, 2009, at 12:35 PM, wbradfordbishop wrote:

    Google has many people in love with their products, myself included, but they need to remember to court investors. great technology without good business decisions supporting it will lose eventually. The employees took a risk like anyone does when they exercised their options, why should they have their mistakes erased using john q investors equity?

  • Report this Comment On September 28, 2009, at 12:38 PM, JonRadoff wrote:

    This isn't an employee vs. shareholder issue.

    The fact is that Google has been facing stiff competition for talent from other Bay Area startups, as well as established competitors from all over the world.

    The question I think you need to ask is whether you want to be able to hold onto the talent. Google regularly exchanges substantial amounts of stock to secure talented teams of developers from startups--why shouldn't it also want to make its own recruiting and retention program as effective as possible?

    Few things will drive your most talented staff into competitors and startups faster than options priced underwater for prolonged period of time. It would cost shareholders far more to have thousands of Google employees looking for more compelling places to work...and the equity market is a more efficient way to pay them (and a stronger long-term motivator) than Google's cash.

  • Report this Comment On September 28, 2009, at 1:06 PM, paul34 wrote:

    Ok, lets go back to math class...giving the investors a (for example) $1.5B dividend payout is what you are suggesting? Where do you think that will come from? It will result in an immediate equity reduction of $1.5B...as the market will quickly reprice the investor's shares downward to take into account the distribution.

    The only way the math works as any kind of gain for investors is if Google takes up a collection from their employees (or other charitable source) to use for the dividend payout.

    Paying a dividend is not compensation to an investor who will see his individual share price drop to match.

    Outside of value creation (i.e. doing your job well) or charitable donation there isn't any other real way to increase shareholder value.

  • Report this Comment On September 28, 2009, at 1:36 PM, foggyethan wrote:

    A few thoughts:

    1. The company doesn't care what you think. Read the prospectus. You bought into a company that told you this up front, where complete voting power is in the hands of just three people.

    2. The stock is up 60% from its low. Enjoy. If you bought above the low, that's not Google's fault.

    3. The word "evil" is an important and powerful word, and should be reserved for stronger things than money decisions that you yourself walked into. (See #1)

    4. This article has an implicit assumption that stock options grants can be compared to stock options purchased by individuals, i.e. that they are both investment decisions with the potential to win or lose, and the risk is on the investor's head. This is false. For employees, these are retention tools. If the options are way underwater, they have no retention value. Employees do not (usually) join a company for the sake of timing the pricing on their options.

  • Report this Comment On September 28, 2009, at 1:45 PM, wuff3t wrote:

    "I hate this notion that the shareholder should be the #1 priority for all businesses. This is simply not the case. The people who do the work for Google are the people who deserve this money, not the people who sat back and clicked a "buy shares now" button."

    You seem to be missing the point that an investor is an owner of the business. That $1.5 billion was their (investors') money, so when you say they haven't lost anything you're dead wrong. And as other people have already noted, without investors those employees would not have a job in the first place.

  • Report this Comment On September 28, 2009, at 4:59 PM, TMFMileHigh wrote:

    Hello foggyethan,

    Thanks for writing.

    "The company doesn't care what you think. Read the prospectus. You bought into a company that told you this up front, where complete voting power is in the hands of just three people."

    I'm not so sure that Google doesn't care. But let's say you're right. Let's say no one at the Googleplex gives a damn what I write or how I vote my proxy. My reaction to that is ...

    So freaking what?

    Seriously.How much good would it do for me or anyone else to whistle away the hours pretending that Google isn't behaving badly? How about zero?

    Put differently: I don't need Google to acknowledge my piece or even my complaint to earn validation. I already know I'm right. Other shareholders believe the same. Our job as owners is to tell management when they're off-base. Google has never been more off-base than it is on this issue, and I plan to keep saying so.

    "The stock is up 60% from its low. Enjoy. If you bought above the low, that's not Google's fault."

    No. The end never, ever justifies the means.

    Thanks again for writing and Foolish best,

    Tim (TMFMileHigh and @milehighfool)

  • Report this Comment On September 28, 2009, at 5:16 PM, TMFMileHigh wrote:

    Hello JonRadoff,

    Thanks for writing.

    "Few things will drive your most talented staff into competitors and startups faster than options priced underwater for prolonged period of time. It would cost shareholders far more to have thousands of Google employees looking for more compelling places to work...and the equity market is a more efficient way to pay them (and a stronger long-term motivator) than Google's cash."

    I've lived and worked in Silicon Valley so I understand this dynamic and the mercenary mentality that it creates. The army only stays when the war chest is full. I get it.

    But this argument comes with a HUGE flaw; it assumes that you have to steal from shareholders in order to keep the employees happy. Because, well, that's the way we've always done it.

    Lame.

    My argument is as it was. Any company -- Silicon Valley tech titan or no -- ought to be willing to compensate shareholders when taking from the equity kitty to reprice options to retain talent. A one-time dividend equal to $460 million in cash, the estimated cost of the repricing, would have sufficed here.

    In simpler terms: Google doesn't get to pretend the equity I supply is free. It isn't. I had to earn that money, and I'm lending with the expectation of a return on my ownership interest.

    Thanks again for writing,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On September 28, 2009, at 9:14 PM, JonRadoff wrote:

    I can't think of a worse way for any growth company (Google or otherwise) to use their cash than to distribute dividends to shareholders. I want them to invest their cash in growing their business.

    Your hypothesis seems to be that Google "owes" shareholders some sort of compensation for doing equity-based compensation. My counterargument is that I don't want them to do anything other than focus on long-term, consistent EPS growth--and to achieve that they need to compensate their employees in an extremely competitive environment. This is just a cost of doing business.

    The only real impact of options is dilution (which again, will factor into EPS). Google buys companies all the time who have an effective cost-basis of $0/share for their stock, yet get piles of GOOG at it's current pricing. Nobody seems to complain when Google buys a company that has talented staff and technology--why is it any different for them to make sure some of their own employees are taken care of (whose only sin was probably joining the company on a date where the strike-price on their options was lousy). Maybe you'd be happier if they all quit their jobs and rejoined when market timing more favored their strike price?

    This is just about removing the unfortunate situation of a lot of people who joined the company at the "wrong" time and keeping them motivated and focused on long-term wealth creation (i.e., EPS growth) which everyone benefits from.

  • Report this Comment On September 28, 2009, at 10:13 PM, TMFMileHigh wrote:

    Hello JonRadoff,

    "Nobody seems to complain when Google buys a company that has talented staff and technology--why is it any different for them to make sure some of their own employees are taken care of (whose only sin was probably joining the company on a date where the strike-price on their options was lousy)."

    The difference is that, as an investor, I can earn a return on the equity invested in an acquisition. There is zero possibility of a return on the equity transferred via options repricing because it isn't an investment.

    Let's put this in visual terms. Say equity is a treasure chest. Investors load it up with various amounts of treasure. Google, in return, promises to use that treasure to create more treasure over time.

    Years of successful investments in capital equipment, projects, and strategic acquisitions follow. The chest overflows, till one day a bad economy reduces Google's investing effectiveness and there's less loot to go around.

    Employees aren't happy about this. So they decide they don't want Google investing for them anymore. "Give us our money now!" they scream, and Larry and Sergey and Eric cave. They scoop a big bucket of gold out of the chest and distribute it at an all-company meeting. "Don't worry about paying this back -- the money's yours. All that gold that's now lead? Toss it in that pile over there."

    Everyone's happy, except for the shareholders.

    Equity involves risk, and the possibility of upside. Stock options with no downside aren't options -- they are cash compensation disguised as stock. And they cost shareholders via lost equity *and* dilution. (Yes, there are two prices to pay here.)

    If it sounds like I'm being overly harsh, I don't mean to be. But I tire of the argument that employee stock options are somehow aligned with shareholder interests. The truth is usually far different -- certainly so in Google's case.

    Still love the company and its software, but loathe this aspect of the business.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On September 30, 2009, at 3:05 PM, paul34 wrote:

    "My argument is as it was. Any company -- Silicon Valley tech titan or no -- ought to be willing to compensate shareholders when taking from the equity kitty to reprice options to retain talent. A one-time dividend equal to $460 million in cash, the estimated cost of the repricing, would have sufficed here."

    No, that would have just taken money out of one of my pockets (my equity pocket) and shoved it into another pocket (my cash pocket). It would not have resulted in a single penny of compensation to me as a shareholder...you can't buy my happiness by giving me some of my own money. That would only satisfy a (lower case) fool. I try to be a bit more upper case than that.

  • Report this Comment On October 02, 2009, at 3:30 AM, slard271 wrote:

    Any shareholder with this complaint about Google probably shouldn't be a shareholder as he clearly does not understand the company, its direction, and its ambitions. The wasted money on your MBA would be better invested in GOOG any day of the week.

  • Report this Comment On October 02, 2009, at 3:32 AM, slard271 wrote:

    Oh, and I like the choice of the word "owes." Yet another dose of entitlement in the USA.

  • Report this Comment On October 02, 2009, at 10:52 AM, TMFMileHigh wrote:

    Hello stard271,

    Thanks for writing.

    "Oh, and I like the choice of the word "owes." Yet another dose of entitlement in the USA."

    Then your beef is with employees who demanded repriced options -- the penultimate in corporate entitlements. Ironic, isn't it?

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On October 02, 2009, at 11:05 AM, miteycasey wrote:

    I'd rather see google give bonuses than investment banks.

    Some people earn their bonuses.

  • Report this Comment On October 02, 2009, at 11:22 AM, TMFMileHigh wrote:

    Hello miteycasey,

    "I'd rather see google give bonuses than investment banks."

    I would, too. Repricing options isn't a bonus, it's a handout taken from someone else's pocket.

    Also, a dividend payout would go to a surprising number of Americans -- probably at least 50% of those of us invested in a 401(k).

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On October 05, 2009, at 11:10 AM, ReadEmAnWeep wrote:

    Shareholders should be number one for a company. But this is usually not the case, and there is nothing there to make them think that way.

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