Alphabet Said to Introduce New Stock System for 'Other Bets' Employees

Changes Designed to Incentivize Execs, Create Startup Mentality

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Google reorganized into Alphabet Inc. last year partly to give each new business, such as its fiber internet service or life sciences group, the independence to operate more like a startup. But there was an important part missing: how to incentivize executives and other employees with stock tied to their performance.

Alphabet is fixing this. Divisions within the company's "Other Bets" group are creating new types of stock that will rise and fall in value depending on how each unit performs, according to people with knowledge of the plans. Executives of these young businesses are at different stages of implementing the compensation system, but in coming months, this new equity will be awarded to more employees as a big part of their pay, instead of the publicly traded Alphabet shares they currently get, the people said.

Verily, a health care business, is adopting the new approach, according to the people, who asked not to be identified discussing plans that haven't been made public yet.

Executives at Other Bets companies have the option to not use the new stock system, said one of the people. Employees may also be given the choice to receive the new equity awards or stick with Alphabet stock grants, this person added.

Alphabet's research lab, called X, already uses a system like this, another of the people said. Executives at Fiber, a fast internet service, decided not to use the compensation tool for now but haven't ruled it out because it could help attract candidates from other parts of Alphabet, who may otherwise leave for jobs at startups promising equity riches, this person said. It's not clear if Nest, another of Alphabet's Other Bets, is doing it, another person said. An Alphabet spokeswoman declined to comment.

The changes are designed to help Larry Page, Alphabet's chief executive officer and a Google founder, get Other Bets companies running more like fast-moving, lean startups and less like research divisions of a highly profitable internet giant.

As things stand now, employees of most Other Bets get stock in the holding company. That means their equity compensation is mostly tied to the performance of the Google digital advertising business, which still accounts for almost all Alphabet revenue and profit.

If the growth of Verily massively outpaces Google's, that probably would not be reflected in the value of employees' equity, possibly reducing incentives to improve Verily's performance. In the future, employees of Verily, which conducts health research and is developing a contact lens to measure a person's glucose levels, will get Verily stock that could appreciate as the business grows.

The Verily plan works like this, according to one of the people who was briefed in detail about it this year: The company will grant Verily stock to employees based on an independent, fair market valuation of the business by an outside firm.

Every six months, staff can sell some or all of their vested shares to Alphabet, which will buy the stock either with cash or Alphabet equity. The price -- or the ratio of Alphabet to Verily stock -- will be based on the latest valuation, which will be updated every six months. If Verily employees leave, they have to convert their stock to either cash or Alphabet shares, based on the last valuation, the person said.

The plans have sparked concern among some employees who prefer the security of a big company, people familiar with the matter said. In the past, working on a new project entailed little risk for staff because if the effort failed, Google kept churning out profit, bolstering the value of employee stock. Now, if an Other Bet company struggles, the new form of equity could be worth considerably less for workers who get as much as half their total pay from stock, according to one of the people.

Some employees have left, or tried to leave, Other Bets companies in recent months to go back to Google's core business because of this, two of the people said. Another person said some Other Bets staff are getting cold feet about their new businesses, and the new equity plans are not helping.

"This puts the pressure on the employees," said José Benitez Cong, a former top talent manager at Nest who is working on a new startup focusing on workplace tools and technology. "As a motivational play, this makes sense because it removes the safety blanket. Before, employees of Other Bets companies knew that Google did pretty well and didn't need to worry about shipping products or services."

Mr. Cong left Nest, which makes thermostats and other home appliances, more than a year ago and said he has no knowledge of Alphabet's new equity plans. However, he said other large, multinational companies use similar "phantom" stock systems to reward executives and other workers in specific divisions.

Mr. Cong expects Alphabet will use a 409A valuation process, where independent firms estimate the value of startups to set the price of equity compensation, such as stock options. "That's the most fair way to gauge the potential market value of these Other Bets," he said. "It's not perfect, but anyone in the Valley and in tech would have a good sense for how this works."

-- Bloomberg News