Google creates new market for stock options

updated 8:33 a.m. ET Dec. 13, 2006

SAN FRANCISCO - Google Inc. employs a lot of brilliant minds, but even smart people have trouble figuring out how much their stock options are really worth.

The Mountain View, California-based company hopes to simplify the task by creating a new online market that will show how much sophisticated investors are willing to pay for the company's options and enable rank-and-file workers to cash out at the prices being dangled.

"We think this will be very valuable in helping our employees understand what they own right from the beginning," said Dave Rolefson, Google's equity and executive compensation manager.

The shift to transferable stock options, announced late Tuesday, is scheduled to occur during next year's second quarter.

Accounting for the change will lower Google's anticipated profit for next year, but the diminished earnings won't necessarily undercut the company's lofty market value because the analyst estimates that guide investor expectations already ignore stock compensation expenses.

With the switch, Google is hoping to make itself an even more appealing place to work than it already has become by feeding employees with free daily meals and ample opportunities to get rich off the company's high-flying stock.

"This should give Google something of an edge" over other employers, said James Glassman, a senior fellow for the American Enterprise Institute, a think tank in Washington, D.C. "Google is going to get more bang for its buck by making its stock options more transparent."

Recruiting and retaining talented employees is a top priority for Google because it's in the midst of a hiring spree that is expected to continue for several more years. Since the end of 2004, Google has been hiring an average of about 10 new employees per day to expand its payroll to nearly 10,000 employees.

It marks the first time that a major U.S. company has established an ongoing market where employees will be able to sell their options to investors looking to hedge complex financial bets.

"Other companies are going to follow suit because it's a good idea," predicted Brian Hall, a Harvard University professor of business administration who has studied the advantages of transferable stock options.

Traditionally, workers make money off their stock options by cashing in on the spread between the exercise price and the current market price of the underlying shares.

For instance, a Google worker who owns 100 stock options with an exercise price of $200 would have a paper profit of just over $28,000, based on the company's Tuesday closing price of $481.78 on the Nasdaq Stock Market.

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