How Google Could Turn Evil

Ah, bailouts. First, there were the banks. Now, we're thinking of one for Detroit. Will Silicon Valley be next?

More than 80% of the Valley's 150 largest publicly traded companies had some employees holding stock options that had fallen below their strike prices as of Oct. 24, The Wall Street Journal reports.

That's a huge problem. Options have long been the compensation tool of choice in Silicon Valley. When the Rule Breakers team met with him during our recent "Innovation Tour" of the area, Benchmark Capital's Bill Gurley told us he loves them. As he sees it, options align shareholders and employees.

But is this always true? Not when shareholders subsidize the risk of holding options -- yet that's exactly what you'll see in the coming months. VMware (NYSE: VMW  ) has already received approval to set lower prices for some outstanding options. Advanced Micro Devices (NYSE: AMD  ) has similar designs, the Journal reports.

They're in good company: Apple (Nasdaq: AAPL  ) , Oracle (Nasdaq: ORCL  ) , and Adobe (Nasdaq: ADBE  ) repriced following the dot-com bust.

Here, repricing is intended to (a) keep employees from leaving to get a better options deal elsewhere and (b) give those who stay a chance to reap upside from a tech recovery, when one occurs. It's a smart, well intended strategy, but also a wealth transfer from shareholders to employees.

Will Google prove to be evil, after all?
I'm opposed to repricing because it violates the spirit of aligning interests. It's evil. I'm worried that Google (Nasdaq: GOOG  ) , a stock I own, will see it as a necessary evil. Behold the numbers:

Company

2007

2006

2005

2004

Options granted

3,408,101

3,425,848

5,335,542

4,775,058

Exercised or vested

(3,572,930)

(8,128,241)

(11,511,586)

(8,033,820)

Canceled or forfeited

(367,157)

(462,381)

(839,811)

(486,341)

OPTIONS OUTSTANDING

12,892,886

13,424,872

18,589,646

25,605,501

Source: SEC filings.

Even though options outstanding are down 50% in four years, those 12.9 million on the books still amount to roughly 641 per employee. Yet, they don't matter much at present; yesterday's close of $311.46 is roughly 7% below the weighted average exercise price. The stock is heading lower again today.

Thus, Google's options are ripe for repricing.

Avoid the temptation, sirs. Not just for my sake, as a shareholder, but for your own. Repricing is an admission of defeat, a chance to lower expectations, to get more from less. That's not the Google we know; that's Yahoo! (Nasdaq: YHOO  ) .

Ask more of yourselves. Innovate. Excel. Beat expectations. Because if you do, you won't need repricing. The market will have repriced your shares for you -- at multiples far higher than we're seeing today.

Get your clicks with related Foolishness:

Apple is a Stock Advisor selection. Google and VMware are Rule Breakers recommendations. Try either of these market-beating services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers had stock and options positions in Apple and Google and a stock position in Oracle at the time of publication. The Motley Fool's disclosure policy thinks that most hot dogs should be repriced.


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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 November 12, 2008, at 9:27 PM, zerodae wrote:

    I read most Fool articles understanding that they are attempting to pump a stock or otherwise sell a subscription. Though undoubtedly vehemently denied the only deniability that comes to mind is the plausible sorts. At the end of almost every Fool article is a 30-day trial link followed by the author's name suspiciously trailed by almost every stock mentioned in the article.

    This article, however, breaks the mold. It is not trying to sell something. Instead, it is . . . well I really do not know what it is doing, but it is such a shameless and blatant abuse of journalistic power that one would expect the author to not only have stock in Google but to work for the Treasury department as well. Maybe you are a banking executive as well and are trying to save the remaining stocks you have?

    That you would rather punish the people who now have nothing (dollar wise) due to outside forces (I will refrain from finger pointing) than to allow the company to do what is right for its employees and retain them is what you would expect in the pre-crisis, f-em-all mentality. Count the perceived price drop you would feel as part of the risk of owning the company.

    I understand that to you there is a clean separation between the company and the workers but that aristocratic view of the world is what has caused so much strife and trouble in the past and present. The kingdom is not much without we meaningless serfs. To stock analysts and fools who label themselves as such, everything is a victimless crime. More often than not, it is not even a crime. Who cares if I (back date this option, cook the books, sell loans to unemployed families), everyone else is doing it and how can I affect the economy? I am only 1 person.

    Personally, the best solution would if Google did not reset the price, people left, and the company tanked. All they do is sell advertisements and the only people who click on them are the same retards who click on spam email. As a bonus, I am sure we would have another whiny article from the author. The likely solution, however, is that this will never make it past the filters.

  • Report this Comment On November 13, 2008, at 2:03 PM, celticspirit wrote:

    The company's primary duty is to do the right thing for its shareholders. If that happens to mean looking after the employees at the same time, well and good. Funny though employees are always saying how a company's success is down to them while any problems are due to management and the employees shouldn't suffer. Employees were happy to take the profit on share options while they could and you could also say the shareholders were happy as the share price was rising. Now while shareholders lick their wounds - they are ordinary joes too who have seen their dollars disappear - you're suggesting the employees ahouldn't have to suffer as well. Anyway, who holds most the options and who will benefit most from a realignment?

    The lesson of today's economic crisis is this - everyone was greedy - top to bottom. The time of reckoning is here, a time to live more simply and within our means. To reduce excessive corporate pay, reward genuine achievement and have more transparency. No more tricks and that includes messing with options.

  • Report this Comment On November 15, 2008, at 2:45 PM, zerodae wrote:

    "The company's primary duty is to do the right thing for its shareholders". This is the sentiment that gets us into these problems. Every bubble starts with these words.

    As for shareholders, shareholders are simply profit sharers. And they only complain when there is nothing to share. Frankly, they are too stupid and short sighted to do anything else. Myself included. Companies should not listen to them nor appease them. Kinda like Congress, neh?

    I worked for an energy company (no, not that one) whose claim to fame was "this hospital went without power interruptions for X years". Unless your shareholders are in this hospital, what would they care? The patients could all walk toward the bright light as long as the shareholders got a dividend raise. And this is exactly what happened when deregulation hit. Not saying it was a bad thing, but when a fundamental cornerstone of your life only cares about "we make X dollars this quarter", take a wild guess what happens? What company comes to mind? "Right thing" for the shareholders, indeed.

    Difference in this article is the stockholder bought the shares with full knowledge of risk (excuse me while I laugh at that sentence). The workers, however, just get these options for performance. Now comes along an industry who is trying "to do the right thing for its shareholders" and causes a global recession. Maybe it is not all their fault, but if we had to point fingers, we know where most would point. Now your performance is out of the equation wrt stock price. Fear takes over. The options are meant to force loyalty on you through maturation dates and bind your performance to your pocket book. If they ain't worth naught and you cannot do naught to make it otherwise, then the effect is somewhat diminished.

    But even then, shareholders do not care. They will pick three other letters and they will buy that stock. They care nothing about the company other than what comes after the $ sign. My original thesis was "We are not going to eliminate corporate greed by squashing the peasants" but that is another essay unto itself. I wish I knew of better forums to discuss/argue these points.

  • Report this Comment On January 28, 2009, at 8:53 PM, artken wrote:

    This is rich! (npi) I was just about to make my first ever purchase of a stock, having read a previous article about Google on the MF - and I run into this diatribe. Second thoughts. Presumably if I did that it would constitute a tiny, tiny positive influence toward raising the value of the stock . . . uhhhh . . . what to do?

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