So the Mail doesn’t understand money then

Google CEO Sundar Pichai receives stock options worth $199 MILLION

….
Google chief executive Sundar Pichai has been awarded restricted stock worth $199 million – making him one of the highest-paid directors of any public company.

Sigh.

Stock options and restricted stock units are not the same thing.

So, further to the request in the comments. And being a little bit simplistic but still covering the essentials.

A stock option is the right to buy shares at a predetermined price. Usually, the price on the date of issue of the options. So, Google is $500 today, we give 100k options to someone, they have the right to buy 100k shares in Google at $500 each at some date in the future. Say, 5 years. If the stock is at $750 in 5 years’ time then they make out like bandits.

However, people are a bit wary of this. An option is worth nothing until it is “in the money”, the share price is above the option price. So while it motivates it’s motivating only some of the time. If there’s a global shift in the markets, nothing to do with the individual company, then the options could be valueless and thus not motivating.

A restricted stock unit is actual stock. We’re going to give you, as part of your pay, 100k shares in Google over the next 5 years. 10k shares every quarter perhaps. We announce the total amount now, the plan, but they actually only move over to your ownership in steps, that 10k each quarter. The restriction is that you cannot then sell them for some period of time: say, again, 5 years.

This is thought to motivate more: because the owner of that stock gets it at today’s price (for the whole period of time) and has to pay taxes on getting that stock too, as they get it (well, the rules are a bit more complex but roughly). They are thus exposed to the down side of the stock as well: they actually lose money as it falls. This is thought to motivate better.

In both cases the stock comes from the company itself. And usually the company goes out into the market and buys the stock which it then gives/sells to the staff. This is what drives the stock buyback plans of the tech companies in fact: not entirely, differs from company to company, but there’s almost always a plan in place to buy stock in the market which is then used to fill options/RSUs to the staff.

11 thoughts on “So the Mail doesn’t understand money then”

  1. Taking the words quoted at their face value, a stock option is a right to purchase stock at some time in the future, for an agreed price & possibly under other conditions. Or in exchange for some other obligation. It may or may not be transferable & thus have negotiable value.
    A restricted stock unit would be an actual issue of stock, but restricted in nature compared with ordinary stock. The restriction could involve voting rights, entitlement to dividend, right to sell without the company’s assent or many other things.

  2. See you were writing, whilst I was writing, Tim
    How they assign a value of $199’s beyond me. Probably took the price of Google ordinary stock. Which under either definition will be way out. Baecuse either he’s got to exchange something to take up the options or the restrictions could greatly discount the stock.

  3. Are you sure that RSUs can’t be sold for a while?

    In many cases I’ve seen the RSUs are immediately sold on the employee’s behalf, with the brokerage fees being deducted from the proceeds and the net cash being handed over (although there is usually on option to retain the shares, the default is to sell – or at least almost everyone has in the schemes I’ve seen).

    I understood that the “restricted” bit was that you wouldn’t necessarily get the full number of RSUs vesting – you might have 10,000 of them, but only get 4,000 because that’s how well you performed (10,000 being very much a stretch goal). But that might just be my own folk etymology.

  4. There have been scandals where stock options were awarded, the shares did badly, so the executives just retrospectively changed the terms to their own advantages. I’ve not read about one for a while, but I certainly read about one or more some years ago.

  5. I seem to recall being in schemes where the share price tanked, so to head off much grumbling the company applied to rebase the option values. I also seem to recall it being a major pain in the arse to get permission from various regulators and taxbastards.

  6. That’s right, but the difference is less real than formal. Stock options often only vest under given conditions and frequently have a strike price close to zero, rather than the current market price. Economically, there is very little difference between a zero strike-price option which you may only exercise under certain conditions and a restricted stock unit.

  7. “An option is worth nothing until it is “in the money”, the share price is above the option price. ”

    Mr Black and Mr Scholes would disagree (so long as their is some historic volatility in the underlying share price and remaining time until the exercise date).

  8. Sounds like because a bob-sleigh team’s got 8 legs it must be a spider, to me, SSAE.
    If it’s an option the value will depend on what price Google are when it’s exercised. And if it’s a restricted stock, how do you price the discount of the restrictions if there’s no current market in the restrictions?
    Neither way leads one to $199M.

  9. @BiS Funny analogy, but what is the difference, economically, between a zero (or close to zero) strike price option which you may only exercise once certain conditions are met and a RSU? Unless the stock has become worthless, you’ll always exercise the option. And if the stock has become worthless, so has the RSU.

  10. At the extreme, not a lot. But Tim posted in relation to a claim it was worth $199M. Not only is the value of the two options an unknown, it’s not even the same unknown.

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