Google: Officially Evil

Not you, too, Google (Nasdaq: GOOG  ) !

Fresh from announcing market-besting quarterly results last night, Google is repricing its employee stock options. In other words, workers holding options with strike prices that are underwater -- and 85% of them are, according to Google -- will have the opportunity to exchange them for new options at fresher market prices.

Sure, the new voluntary exchange will add a year to the vesting schedule, but it's still a great deal for employees -- and a lousy one for shareholders.

Investors don't get a mulligan. Joe Googleholder, who snapped up the stock at $600 a year ago, can't just lower his cost basis to $300 and get half of his money back. The move will result in a $460 million modification charge if all of the underwater options are exchanged.

"I'm opposed to repricing because it violates the spirit of aligning interests," Fool Tim Beyers wrote two months ago. "It's evil. I'm worried that Google, a stock I own, will see it as a necessary evil."

Well, slap the goatee on Big G's doppelganger, because the company has indeed gone to the dark side.

Google is only the latest company to mark down its stock options:

So what's the deal? I understand the concept of stock options as both a retention and motivational tool. If a stock rises, a company's hires likely deserve a piece of the action. Why mark it down if the opposite happens? Why should employees get a do-over?

If you argue that individual employees aren't to blame for a stock's demise, why nurture the illusion that they are the ones responsible for its ascent?

"They're not stock options," Fool Bill Mann wrote last year, when homebuilder M.D.C. Holdings (NYSE: MDC  ) went the repricing route. "They're a sure thing."

I couldn't agree more. Repricing merely adds insult to injury for smacked-down investors. I understand that companies need to attract and retain their talent. But why should shareholders be stuck with the dilution tab?

Other ways to spin the content bottle:

M.D.C. Holdings is a Motley Fool Hidden Gems selection. VMware and Google are Motley Fool Rule Breakers recommendations. Discover more market-beating stock selections when you try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't even like to see football teams run the option. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy never goes back on its word.


Read/Post Comments (14) | Recommend This Article (36)

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 January 23, 2009, at 5:14 PM, jackdaniels08 wrote:

    Rick Aristotle Munarriz, you really are short sighted. Go by yourself some new glasses. You can't be so ignorant as to not see why Google is doing this. Think of it as an investment, an infrastructural capital expenditure if you want to, one to sustain and stabilize the longterm structural build of brainpower and brain trust of an amazing company, and you sustain a great company like Google by retaining that brainpower they worked so hard to attain and build over the years. You hedge against losing the greatest minds on earth my creating an incentive to keep them there. Years down the line, when we have got through this economic storm of gargantuan proportions you will see the absolute worth in it all. Other companies will probably do a similar program. That, sir is next to if not impossible to replace true shareholder value.

    P.S. A couple years from now you will probably look back at this article and I will keep on reminding you about it over and over and over again!

  • Report this Comment On January 23, 2009, at 5:44 PM, pgoel6uc wrote:

    If you remember, shareholders are at the bottom of the hierarchy. Employees are, arguably, at the top. I don't think there is anything wrong when a company invests in its assets. And for a company like Google, it's their employees. I don't think you said the same thing when American Airlines announced that they are buying more planes. They are piling up huge losses and still making capital investments. Why not Google??

    If you don't agree with their philosophy of keeping their employees happy (as one of their top priorities), you shouldn't be their shareholder in the first place.

  • Report this Comment On January 23, 2009, at 9:11 PM, jwest94 wrote:

    Not even close guys. You are trying to tell me that Google employees were going to leave their jobs in one of the toughest job markets ever because they were going to lose money on company stock options that they chose to purchase? Please tell me you are not that naive. They wouldn't leave and they wouldn't blame Google. They would blame the market. To even think for a second that this is an investment in it's own employees is a joke and if Google is thinking that way management needs a quick slap of reality.

    The simple reality is there is no real benefit to this and the only losers are the shareholders.

  • Report this Comment On January 24, 2009, at 1:29 AM, needsadime wrote:

    Does Rick actually get paid to write this stuff?

  • Report this Comment On January 24, 2009, at 4:09 AM, ronpaulite wrote:

    Google has gone to The Dark Side a long time ago.

    They keep reminding themselves "do no evil", but it's useless, because it is evil by nature.

    And everybody thought Microsoft was The Evil One.

  • Report this Comment On January 24, 2009, at 5:12 PM, TMFTomGardner wrote:

    While I'm not sure I'd use the word "evil", I do find it objectionable. I agree with jwest. This is not a time that many employees anywhere have the leverage of numerous other employment opportunities. But even if the company wants to reassure and reinvest in its staff, just do so with cash. . so that the cost is plainly evident to all partners of the company (which includes passive shareholders). This is why Buffett does not grant options. It's why Bill Gates at Microsoft calls option granting one of his biggest mistakes as a leader. Either employees should be granted restricted stock, with a clear value which gains or loses with the performance of the company stock. Or they should be paid in cash, with as much right to use that cash to buy company stock as anyone else. I don't see this as an "evil" move by Google, but I do see it as "objectionable".

  • Report this Comment On January 24, 2009, at 5:40 PM, jackdaniels08 wrote:

    @ronpaulite. Are you out of your mind? Yes you are! Microsoft was the one that was broke the law numerous times and got fined heavily for it. You make as much sense as Ron Paul. Zero!

  • Report this Comment On January 25, 2009, at 4:17 AM, mdabat wrote:

    I totally agree with this article and I don't understand why those opposed to it are very critical. As a shareholder, I hate the concept of stock options and such re-pricing basically adds salt to the wound. Plus, stock options are not a form of investment in your employee base, especially during a recession. Employees of Google are MORE THAN HAPPY to be working there instead of having no jobs.Unemployment is growing, union bargaining power is weakening, and there is a large pool of unemployed and skilled individuals who can be hired instead. I want to see my investments appreciate in price with time, and I don't want to suffer from significant dilution and less appreciation because Google thought it should reward its employees even though the stock price declined so much.

  • Report this Comment On January 25, 2009, at 11:20 AM, brwn8484 wrote:

    You want me to accept on one hand the risk of part ownership in a company and then on the other hand you want me to absorb the cost of stock ownership unequally, by allowing certain employees to buy their stock at special price.

    I could understand this logic, if it was disclosed when I purchase my part ownership, but as usual the shareholder is expected to bear all risks with little or no recourse when share value is diluted unreasonably.

    To all of you who think this repricing is made to retain employees, I have a piece of land or bridge that I have been looking to unload for a number of years. This is most definitely not about employee retention. It is more about protecting the portfolios of the guys at the top. You can use all manner of logic to justify this behavior, but it fits with all the behavior that got us into this financial fiasco... Including immoral and criminal behaviors by the people that are in charge of our political, corporate, and fiscal house of cards. Ponzi, Ponzi everywhere......Just when you thought it was safe ... we get another Ponzi scheme to add to our list of immoral behaviors being foisted on shareholders.

    Unfortunately, as long as we continue to unfairly reward certain individuals at the expense of the rest, our economy will continue to falter and possibly fail.

    This thinking is the tip of the iceberg. Management will continue to erode shareholder value at the expense of management and employee protection. Where this end is anyones guess. One thing I do know,,, this behavior will continue until shareholders make their voice heard.

  • Report this Comment On January 26, 2009, at 2:34 PM, richard415 wrote:

    Correct me if I'm wrong, but doesn't the board at some point have to approve the exchange? Would they have done so if they thought it not in the best long-term interests of their investment?

    Google has a $101 billion market cap, and this move could cost it $460 million. If every employee swapped their options. And stayed long enough to exercise all of them. Just how much is this dilution going to affect you?

    As far as employment opportunities: Google strives to hire the very best, but in return it expects a lot from them. How awful is it for them to reward their employees in exchange for another year of commitment?

  • Report this Comment On January 28, 2009, at 4:48 PM, huddaman wrote:

    So first they grant stock options, then since the value of their stock went down, they decide to lower the strike on those stock options.

    It sounds bad, but I think what could be worse is, awarding hard cash to employees.

    I don't think Rick is doing anything wrong by reporting and criticizing Google for awarding 400MM bonus. The question is, whether 400MM is excessive or normal for its size.

    It comes on average upto $20k per employee, so it sounds excessive, but perhaps most of the employees are high performers, as Google had very stringent hiring standards. 20k for great employees is not too high. Executives probably get much higher bonus anyway.

  • Report this Comment On May 12, 2009, at 3:42 PM, Trapper5 wrote:

    I'm getting really depressed with the quality of fool articles. Options are a tool for retaining and motivating employees. Underwater options do neither. Fool articles always tend to take a very short term, what's the next quarter going to be, attitude. Google's view has always been that the best way to maximize shareholder value is by building a strong company over time. And one way to do that is to keep talented employees.

  • Report this Comment On May 13, 2009, at 1:12 PM, masterN17 wrote:

    Enough people have chimed in about retaining employees, corporate structure, financial effects, etc. so I should boil it down to the basics for Joe Googleholder: There should be no sympathy for the sucker who bought in at $600.

  • Report this Comment On September 29, 2009, at 5:26 PM, USNHR wrote:

    The strike price is the strike price, don't give employees a better price just because the stock declined. As many have pointed out, most will not leave google in a down market, and in an up market those strike prices will look pretty good, unless of course Google fails to perform, in which case the employees should not benefit. The adjustment google made is wrong, pure and simple.

    The whole options as compensation philosophy is drastically wrong to begin with. Who in the company has enough power, influence, and direction to cause major changes in the stock price, relatively few, and yet a middle manager from the (HR, Marketing, Janitorial Services, IT) department gets options as part of their compensation? If an employee isn't putting their best foot forward for the company, they should be fired... Joe Shmoe doing an average job in department X shouldn't get options. Yet options are often awarded by paygrades and have nothing to do with performance.

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