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

A few weeks ago, the following headline showed up in one of my Google alerts: “Why Did Google Pay Nearly Twice In Stock-Based Comp than Apple last Quarter?” I like to think of myself as being pretty smart about stock plan accounting, so this seemed like a question I ought to be able to answer. Today, I take it on.

Apple to Google: Stock-Based Compensation
As noted in the story, both companies are Silicon Valley high-tech companies, competing for a lot of the same talent pool against a lot of the same companies, so you’d expect them to have similar compensation strategies. Digging a little further into their Forms 10-K, I was able to determine that they both grant a mix of stock options and RSUs. Apple has some RSUs that vest in as few as two years and Google has some RSUs that have some sort of cliff vesting that I couldn’t figure out from their disclosures, but other than those minor differences, their options and awards vest over four years. In addition, both companies recognize expense on a straight-line basis, so monthly versus annual vesting wouldn’t account for a difference in the expense they recognize. (Google has options that vest monthly; Apple’s options vest annually, bi-annually, or quarterly. Google appears to have at least some RSUs that vest annually, I couldn’t figure this out for Apple).

Apple’s stock plan expense for their quarter ending on June 25, 2011 was $284 million. Google’s stock plan expense for essentially the same quarter was $435 million.

Is it Google’s Exchange Program?

At first I thought maybe the difference was due to Google’s option exchange program. In March 2009, Google completed an option exchange program that was notable in that 1) it was a one-for-one exchange, which is virturally unheard of these days and 2) they allowed options that were barely underwater to be included in the exchange, rather than including only those options that had exercise prices in excess of their 52-week high. The incremental expense for a one-for-one exchange that included somewhere around 50% of their outstanding options seemed like a good candidate to explain the difference in expense.

But I don’t think this is it. The exchange resulted in a charge of $360 million, of which $189 million has already been recognized and the rest ($171 million) will be recognized over another three or so years. This could account for some of the difference, but I don’t think it is the whole story.

So What Is the Difference?

I think it just comes down to the fact that Google has been making grants for more value in the past few years than Apple. This is probably in part due to the fact that Apple’s average stock price for the past four years is around $210 per share and Google’s average stock price for this same period is around $510 per share. Where grants are based on a percentage of compensation or some other monetary amount, a higher stock price theoretically means that the company will grant options and awards for fewer shares. But, given differences in compensation philosophies between companies, I’m not sure that this will be true when comparing, say, Apple to Google.

In other words, if Apple’s stock price were to double from one year to the next, I would expect that the number of shares they grant might decrease commensurately. But just because Apple’s stock price is less than half Google’s price doesn’t necessarily mean that they are granting a commensurately greater number of shares than Google. There are just too many other factors at play in compensation decisions.

And, in fact, the total fair value of Google’s grants (both options and RSUs) for their 2010 fiscal year was somewhere around $2.4 billion, whereas the total fair value of Apple’s grants for the same period was somewhere around $1.3 billion. For their 2009 fiscal years, there is a similar discrepancy: $1.6 billion in fair value for Googe’s grants and .9 billion in fair value for Apple’s grants. Interestingly, for 2008, the companies granted about the same amount of fair value. but for the 2007 year, the aggregate fair value of Google’s grants was $1.8 billion to $.6 billion for Apple.

BTW: 1) Note that I am backing into the aggregate fair value per year numbers by multiplying the shares granted by the weighted average fair value for grants during the year. 2) Kudos to Apple for voluntarily including three years in their stock plan activity roll-forward, so that I didn’t have to pull up each 10-K separately to get their grant amounts for all three years.

With vesting schedules–and, consequently, service periods–of four years, both Google and Apple’s current expense includes the fair value of grants made in prior years, going all the way back to 2007.  Because Google has historically issued awards with a greater aggregate fair value than Apple, they are now recognizing more expense for those awards (plus they have some additional cost as a result of the option exchange program).

Tune in Next Week

This perhaps explains the difference in the current period expense, but it doesn’t explain why Google is granting awards for significantly more fair value than Apple, especially given that as of their most recent Forms 10-K, Google has only 24,400 employee compared to Apple’s 46,600 employees.  Tune in next week when I discuss this question. 

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