Google Introduces Novel Stock Plan for Employees

Google has a launched a new stock option program that will help its employees better realize the value of their stock option grants, experts say.

By doing so, however, Google has taken away the pay-for-performance nature of stock option grants, they say.

Under the transferable stock option program, which Google announced Tuesday, December 12, employees can sell their options once they vest. Through a partnership with Morgan Stanley, Google has set up an online auction marketplace whereby financial institutions can bid for employees’ options.

The new options have a 10-year life span and the same vesting schedule as existing options, with some vesting after a year and all vesting within four years. The program is not available to executives.

“In addition to increasing the value of every option employees receive, the TSO program makes the value of their options much more tangible,” the Mountain View, California-based company said in a statement on its official blog (googleblog.blogspot.com). “By showing employees what financial institutions are willing to pay for their options, it is made clear that the value of their options is greater than just the intrinsic value.”

Given the value of Google’s stock, which closed at $482.12 per share Thursday, December 14, it might be hard for employees to appreciate the value of their options—particularly prospective employees who can’t fathom that the price could continue to go up, says Mark Reilly, a compensation consultant.

The new program addresses that issue. But at the same time, by giving employees the ability to sell their options so soon the company is no longer aligning the options with company performance, says Russell Miller, practice leader at Korn/Ferry Executive Compensation Advisors.

With traditional options, an employee loses money if the value of the stock decreases. But with the transferable stock options, the stock could remain flat or fall and the employee will still get the value of the grant.

“That’s the tradeoff,” he says. “The new program enhances employees’ perceived value of their options at the time they are granted, but diminished the pay-for-performance orientation of the grant.”

The new program also weakens the ownership culture that has defined Google, Reilly says.

“This doesn’t encourage employees to be partners in the business; it encourages them to cash out,” he says. “If they were going to do that, they could have just offered a bonus program.”

But stock options are too core to Google’s industry, and besides, creating a completely new stock option program for employees is “much cooler” than just offering a long-term incentive program or restricted stock, says Bill Coleman, president of Salary.com.

“It’s a trademark Google move,” he says. “They are saying, ‘We aren’t going to do what everyone else is doing. We are going the think through this and come up with something clever and creative.’ ”

Now that Google has made the move, it will be something that all technology companies will look at but only a few will be able to do, experts say. For one, the administrative costs to create such a program are high, Meltzer says. It also takes a special kind of company to attract financial institutions to want to engage in something like this, he says.

“This kind of program isn’t going to be available to everyone,” Meltzer says.

—Jessica Marquez