Google's options

Google announced this week that it has re-priced 7.64 million stock options belonging to 15,642 non-executive employees.

Why? The stock's price (NASDAQ: GOOG) has taken a beating in the last year, not unlike everybody else's. It peaked at $594.90 in early May 2008, then tumbled to $259.56 on November 20. That represents a loss of about 56% percent of value, peak to trough.

There was some recovery (post-election optimism? Your call) so that on February 9, GOOG closed at $378.77. The optimism has worn thin, and the stock was back down to $308.57 when they made the announcement changing the options terms Tuesday.

A stock option has an "exercise price." The idea of giving options to employees of course is that it gives them the incentive to work to get the actual price well above the exercise price, so that they can garner the difference when they cash in.

But Google's employees have of late found themselves with options on $300 stock with an exercise price that was reasonable when they were at the peak -- $500 a share or higher. That far underwater, incentive effects are hard to imagine.

Look for such deals to become a contentious issue in the months to come, though, as stockholders worry about the dilution of the value of their stocks for the benefit of employees. Likely ticked-off shareholder argument: "Do we really need to worry about incentive effects in today's labor market? Will the top talent in Google's fields leave? If so, where will they go? who is hiring?"