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Do No Evil, Revisited

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Some wounds will never heal.

This morning's Wall Street Journal is taking Google (Nasdaq: GOOG  ) to task for last year's controversial options repricing. With its stock mired in a bear market slump last January, Google announced that it would whip out a pricing gun and allow employees to swap options that were well out of the money at the time for new options at current prices.

Google hires ultimately exchanged 7.6 million employee stock options with an average exercise price of $522 for new options -- with longer vesting schedules -- at a more attractive $308.57 exercise price in March.

The search-engine giant's justification at the time was that sky-high exercise prices weren't creating much of a motivational tool. Shareholders, of course, didn't have the same kind of luxury. Now that Google's stock is well above the original average strike price -- and a few good trading days away from more than doubling the price of the revised price -- this morning's "Heard on the Street" column asks the mother of all ethical questions: "Should Google consider a reverse repricing to lift the exercise price back to where it was?"

We all know the answer. Of course Google won't reverse its revision. It probably can't, given the turnover in affected employees over the past year. It would also set the lousiest of precedents in rewarding employees when the stock tanks, and punishing them when it bounces back.

Google wasn't the only company to reprice its employee stock options when equity prices were tanking. Homebuilder M.D.C. Holdings (NYSE: MDC  ) , virtualization-software giant VMware (NYSE: VMW  ) , and chip maker Advanced Micro Devices (NYSE: AMD  ) all went down that desperate road.

But Google will never live that down. It was as indefensible then as it is offensive now. Even if a Google cheerleader argues that the repricing worked -- and that it motivated Big G's workforce to lead the company to market-topping gains last year -- he or she misses the flipside of that argument: If any hire can move the stock price higher, then why were they rewarded last year, when the stock price moved lower?

The ugly truth is that stock options aren't priced as motivational tools. They are retention tools, cuffing employees to serve out vesting sentences. Last year's repricing may have succeeded on that front by extending those schedules, but Google will be reminded about this in the future -- long after most of those employees have moved on.

Google and VMware are Motley Fool Rule Breakers picks. MDC Holdings is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz still uses Google a lot in his daily life. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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