The NASPP Blog

Last week, I compared Apple and Google’s stock compensation expenses and determined that Google’s expense is significantly higher because Google’s grants have historically been for greater amounts of fair value. This week I look at the underlying question of why Google is granting more value (and, thus, presumably more compensation) to its employees.

Apple and Google: The Real Question
All other things being equal, both companies are competing for the same talent pool, in the same area of the country, and should presumably be granting about the same amount of fair value. In fact, because Google has about half as many employees as Apple, you might expect Google to be granting awards for about half as much aggregate fair value as Apple, not almost twice as much fair value, as has been the case in some years.

Mitigating Circumstances

Of course, it’s not that simple. I’m sure part of the problem is perceived value. From a fair value standpoint, the higher the stock price, the more value an option has (both companies grant a combination of options and stock).  But employee’s tend to assign a lower value to options with a higher exercise price.  So while Google’s skyrocketing stock price (averaging about 2.4 times higher than Apple’s over the four years of grants that I compared) has also caused their stock plan expense to skyrocket, that hasn’t translated into higher perceived value for employees. In fact, the reverse is true. So Google has likely had to grant a disproportionately high number of shares for its employees to assign the same value to their option grants as Apple’s employees do.  This is one of the inefficiencies of stock options. 

Another consideration may be other compensation programs that each company offers.  A response to the blog I referenced last week noted that Apple has an ESPP but Google doesn’t. (Wait–what?  Google doesn’t have an ESPP? How in the heck can that be? It’s true though, their 10-K makes no mention of an ESPP.) Because Apple has an ESPP, which, in my opinion, has a high perceived value in comparison to fair value (especially in Silicon Valley), they may be able to make smaller awards to employees.  Apple’s ESPP increases its stock plan expense, however, so this clearly isn’t the whole story. But Apple may offer other benefits–bigger cash bonuses, work-life programs, etc.– that aren’t included in their stock plan expense and that offset the smaller awards to employees.

And, although we think of these companies as being located in Silicon Valley, they are both large organizations with offices and employees in many locations.  Apple, for example, has main campuses in Austin, Singapore, and Ireland, in addition to Silicon Valley.  Having offices outside of the valley may impact Apple’s compensation structure.

The Real Reason

Finally, however, I suspect that the real reason Google is recognizing more expense for their stock plan can be found in the Beneficial Ownership of Management Table in the proxy statements of the two companies. As a group, Apple’s executives and directors control less than 1% of Apple’s outstanding common stock. Google’s executives and directors as a group control 69% of the votes on Google’s stock. In fact, the two founders together control close to 58% of the votes.

The amount of votes that Google management controls means that Google gets to do things with its stock plan that Apple’s shareholders probably won’t stand for, including offer a one-for-one option exchange and grant awards for greater value year after year. Google doesn’t care about burn rates and overhang: they aren’t worried about getting approval for their next allocation of shares to their plan (or their Say-on-Pay proposal)–they already have the votes they need. 

Paid Out?

It’s interesting to me that the blogger characterized the stock plan expense as amounts that were “paid out”: “On last week’s Google (GOOG) earnings call, CFO, Patrick Pichette revealed that Google paid out [emphasis added] $384 million in stock-based compensation in the June quarter.” He makes a similar statement regarding Apple.

I didn’t listen to the earnings calls, but I’d be surprised if the companies characterized this as a pay-out. When I first read the blog, I thought maybe he was referring to the intrinsic value realized upon exercise of options, and not stock compensation expense, but Google employees only realized $86 million in intrinsic value on their option exercises (and an undisclosed amount, but less than $4 million, on sales of options in Google’s TSO program), so this isn’t the case.

I suspect this is a common misperception in the media and I wonder if the blogger understands that the expense Google and Apple recognized has no relation whatsoever to the amounts employees are actually realizing on their stock compensation.

NASPP Conference Hotel is Filling Up
Don’t wait any longer to make your hotel reservations for the 19th Annual NASPP Conference–the Conference hotel is quickly filling up.  The Conference will be held from November 1-4 in San Francisco; register today and make your hotel reservations before it’s too late!   

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara