The AP has a report by Michael Liedtke about a new plan in which employees with old stock options can exchange them for new options with a lower exercise price. This may result in $460 million in accounting charges.

http://www.google.com/hostednews/ap/article/ALeqM5jJOMhRpVm-GGkWh_D0MrkFqXTKjwD95T5UV00

It says that stock holders are unhappy because this action is depressing their stock price.

Usually the exercise price of an employee stock option is the current price when it is issued. I believe that this allows the employee to treat this as non-taxable compensation. I wonder how the IRS will treat this transaction. Will it be a new tax free compensation, or will the employees making the exchange be liable for the tax on the difference?
If this is an exchange and they are not permitted to also keep the old options then they may be liable for a capital gain this year.
If they are allowed to keep the old options this would dilute the share value even more.

For example if an employee had 1000 options with an exercise price of $700 and exchanges them for 1000 options at $325, would they be liable for tax on $375000.00 even if they never exercise the new options?

Implicit in my previous post was that these were Google employees and Google stock options.

Rick Aristotle Munarriz at The Motley Fool has another story about this entitled "Google: Officially Evil".

http://www.fool.com/investing/high-growth/2009/01/23/google-officially-evil.aspx

Here are two more takes on this.

http://www.247wallst.com/2009/01/stealing-from-s.html
http://www.alleyinsider.com/2009/1/google-option-exchange-employees-come-first-goog

Google recently announced that 2008 Q4 results exceeded expectations.
If they were in fact expecting poorer results, then the prior issued compensation with values based on those results should be exceeding their expectations.

http://www.isedb.com/db/articles/1974/1/Google039s-Q4-Results-Exceed-Expectations/Page1.html