Naw, I doubt that Google will run the auction. And I wouldn't make too much of the word "auction" here. Every transacton on a stock exchange is an auction. And keep in mind that Google has never held an auction. (Adwords is NOT an auction, no matter how hard they try to make you believe that it is.)
The writer of the C¦Net article didn't quite understand what the innovation here is, so I will explain it:
When traded in an open market (as with listed or OTC options) options have two components to their value.
1. Inherent value. The difference between the strike price of the option (the price that must be paid for the underlying stock when the option is exercised) and the current market value of the stock.
2. Time value. You might want to think of this as the value of the option itself.
This is partly determined by the risk-free interest rate. When you buy an option, you are freed from having to tie money up in purchasing the actual stock. The money that you DIDN'T use to buy the stock can (in theory - of course, you may not have the money to start with...) can collect interest.
There is also a risk premium. An option limits your potential loss - you can't lose more than the price of the option if the stock price goes down. If you buy the actual stock, your potential loss is greater. This protection from loss has value, and thus we have the risk premium. Risk premium is mainly determined by the volatility of the underlying stock. The more volatile, the greater the risk premium.
There are other factors of lesser importance - for example, the value of future dividends. In this case, that's not a likely factor. (Google is not expected to pay dividends in the near future.)
The time value is worth - well, it's worth what people are willing to pay for it! But there are mathematical formula to rationally estimate time value. The most common of these is called the Black-Scholes formula or model.
An option has time value even if it has no inherent value. (Even if the current stock price is below the strike price of the option.)
Now, this is true for listed or OTC options (those that trade in some sort of market). One problem with employee stock options is that generally they cannot be transferred. So, the employee is not able to realize the time value of their options. They are only able to realize the inherent value, and then only at the time that the actually exercise the option.
You may have seen this issue in the financial news lately. U.S. public companies are being encouraged to value employee stock options using the Black-Scholes model. This affects reported financial results, as it fully recognizes the value of options granted to employees.
I gather the Google options will not trade on a public exchange, but will be traded to a favored few financial instututions. These options aren't suitable for public trading on an exchange, since they have varying terms and strike prices. They are going to have to trade on a restricted, OTC market.
Note also that these options have longer expiration dates than listed options. Most options have terms not exceeding a year. There are a smaller quantity of standard options that have expiration dates of 2 or 3 years. But these employee options can have expiration dates up to 10 years in the future.
Google's investment banker will "make a market" in the options, maintaining an order book listing the prices at which buyers and sellers are willing to make a transaction. This is the "auction" they are referring-to.
(If Google itself conducted this auction, it would both be highly irregular and a publicity ploy. This auction will probably be represented on a spreadsheet on one trader's computer. OK, the investment banker probably has a central database for OTC oddball options. They already have the system to trade this, in any case, and what would be the accomplishment if Google did it? Given the volume, this is something that would run on your grandmother's original IBM PC, with enough CPU time left to play Solataire all day. We're probably talking a couple of trades per day, if that.)
Google employees get to unlock the time value of their options. This is a bonus for the employee even if they would have otherwise exercised the option and acquired the stock. They can still buy the stock with the proceeds, and have money left over. (Or buy more stock.)