Private Auction Is First for a U.S. Company
By Sara Kehaulani Goo
Washington Post Staff Writer
Wednesday, December 13, 2006
Google has come up with yet another novel way to reward its employees.
In keeping with its offbeat approach to business, the search-engine firm plans to create an online auction for its 9,000 employees to sell their stock options to financial institutions. The goal is to give workers a new avenue to cash in on Google's stock, which has increased five-fold since the company went public two years ago.
It would mark the first time a U.S. company has created a private Internet auction for stock options. Investment experts called the idea creative and said other firms might follow suit if Google's plan succeeds.
The private online auction is to be managed by Morgan Stanley and accessible only by Google employees and the participating investment banks.
Google executives said the plan is designed partly to help employees understand the value of their stock options, which may be higher than the share price on Wall Street.
"The challenges we have with options we're granting today are the same as any company -- there's very little transparency to employees in terms of the options' value," said Dave Rolefson, Google's equity and executive compensation manager. "We're trying to help employees understand their options are valuable by showing them what someone else might be able to pay for them."
Many companies give stock options as a way to recruit, retain and compensate their workers. Options give an employee the chance to buy stock at a fixed price, often the market price at the time the option was granted, for a specific period of time. If the shares rise, the employee can profit by buying at the lower price and selling at the market price.
Google's stock options proved valuable to its early employees because its shares rose sharply from its initial offering price of $85 to close yesterday at $481.78 on the Nasdaq Stock Market. Some analysts questioned whether Google's share price can continue growing at the same rate, which could mean new employees might not reap the same benefits from options as those earned by people previously hired.
Google's stock options typically vest in full over four years and expire after 10 years. Google has 6.6 million outstanding employee options, some of which are at strike prices at or above the current market value.
Stock options were a hot recruiting tool in the late 1990s, when Internet companies made millions of dollars after going public. Option fever abated after the Internet bubble burst and regulators imposed a new accounting rule that took effect last year, requiring companies to deduct the value of options as an expense. Today, stock options are still common, but some firms have questioned their value.
"There's been a huge debate as to whether stock options have value, and this settles that debate for me, personally," said Arthur Levitt, former chairman of the Securities and Exchange Commission and senior adviser at the Carlyle Group. "If this develops into a broad market, we have a very interesting way of liquefying the holdings of employees in a very constructive and creative way."
Levitt was among the handful of experts Google briefed about the program in advance under a non-disclosure agreement, which allowed them to talk to reporters who were also briefed.
Google said it plans to start its "transferable stock option" program by April, giving employees access to a private Web site where investment banks approved by the company will be able to bid on options employees want to sell. Options, which must be vested before being offered, would be sold to the highest bidder. Once bought, they cannot be resold and would expire within two years. Senior executives are not eligible to participate.
Google is counting on banks being willing to buy employee stock options as a new way to bet on the future of Google's share price.
Some people might have trouble understanding why Google, a company that pampers employees with free gourmet meals, free dry cleaning, and transportation to and from work in the San Francisco Bay Area, would worry about compensation. Investment experts said Google is addressing a long-term issue that could help it remain competitive with start-ups, where the lure of making a big payout might be stronger.
The program also comes as Google is struggling with a compensation imbalance among employees. A large number of longtime Google employees became millionaires after the firm went public in 2004. Since its workforce has tripled over the past three years, Google now has a large group of workers who must wait out their vesting periods and hope that Google's shares continue to rise during that period.
"What this does is addresses a major employee perception issue," said Ted Buyniski, senior vice president of Radford Surveys and Consulting, a unit of Aon. "Your average employee, if I say you can have an option on a stock at $10 a share or at $500 a share, most of them say give me the $10. They automatically think $10 stock will go to $20 faster than a $500 stock will go to $1,000. The real issue is how fast is the whole company growing. What transferable options do is, they help close that gap between the perceived value of the option and the financial value."
In the short term, Google said it would incur some costs related to setting up the program, but investment experts said they expect little, if any, financial impact on Google's bottom line. Over time, the company may even benefit by reducing the number of options it grants if employees think the private market is adding extra value to their existing options.
Like Google, Microsoft made millionaires of its employees through stock options and once helped them sell their options, but under different circumstances. After Microsoft's stock fell in 1999, many employees were holding worthless options. In 2003, Microsoft created a one-time opportunity for workers to sell their options to J.P. Morgan Chase at a fixed price.
Nell Minow, co-founder of the Corporate Library, an independent corporate governance research firm, expressed skepticism about Google's plan because it seems to defeat one purpose of options -- retaining employees and limiting their opportunities to cash out and join competitors. Minow said Google's plans are "innovative." But in the end, she said, "it's just as likely to encourage people to jump ship on the options than it is to hold onto them."
Other experts disagreed, saying that most employees cash in their options soon after they are eligible anyway and that the new market may enhance loyalty. Google is "being quite forward-thinking in terms of establishing a mechanism that is useful" for valuing options, said Joseph A. Grundfest, a former SEC commissioner and Stanford University law professor.
Google executives said they had extensive discussions with the SEC about their plan and think it complies with federal regulations.
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