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February 05, 2009

Could Restricted Shares Solve an Incentive Problem at Google HQ?

Catherine New
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Google recently announced a plan to allow employees to exchange their stock options for new ones at a lower strike price. The program aims to create better incentives for employees, who have seen the company’s stock price fall more than 50% since 2007. Professor Wei Jiang offered her thoughts on the program in the Financial Times. She said:

How might Google justify its plan to exchange employee options? First, it might say that, without this initiative, staff will stop putting in long hours or coming up with ideas, since rewards would not kick in until Google’s stock price regained the $400-plus mark — a dim prospect in the foreseeable future. There is some truth to this. But how can exchanging options provide much incentive if employees expect them to be exchanged again if things do not work out further down the road? Second, it might say that without this measure staff will move. Yet there are few greener pastures out there. And why not give key staff restricted shares? Options are “cheaper” only when they are not properly expensed. Another argument is that Google staff should not be punished by stock price falls that were mostly due to the global financial crisis. I agree. But then, should the same rule not apply when the company’s stock price goes up in a bull market?

Photo credit: Keso S.