Microsoft employees to get shares instead of options

Microsoft will replace its employee stock option plan with a program that will allow employees to earn actual Microsoft shares, the company said Tuesday.

The "Stock Award" program will begin in September and is the result of a more than year-long review of compensation at Microsoft by the software maker's top management, with input from employees, the Redmond, Washington, company said in a statement.

The new scheme should help Microsoft attract and retain the best employees, the company said. Furthermore, although the plan is open to potentially all of Microsoft's employees, for 600 key executives a significant amount of stock-based compensation will depend on growth in customer numbers and customer satisfaction, Microsoft said.

Steve Ballmer, Microsoft's chief executive officer, and Bill Gates, the company's chairman and chief software architect, will not receive stock awards and also have never received stock options, Microsoft said.

Microsoft also said it is working on a plan to help employees realize some value out of stock options that are worthless because of strike prices above the current value of Microsoft's shares. These options are "underwater" in financial industry jargon. Microsoft is looking at offering employees a way to sell those options to a financial institution, the company said.

Stock options were the miracle drug of technology companies at the height of the technology boom, used to fatten compensation packages and attract the best employees. However, with the decline in IT stocks, many of them lost their effectiveness.

As a result of the change in how it compensates employees, starting with its 2004 fiscal year Microsoft will start expensing all equity-based compensation, including previously granted stock options, the company said. Microsoft started its 2004 fiscal year on July 1. The company is scheduled to release its fiscal year 2003 results on July 17.

Expensing of stock options has been a hot topic among technology companies. Intel Corp. has been one of the most vocal in opposing the idea, saying it does not make sense because the value of options is uncertain.

Microsoft's move, however, does not mean the company is taking sides in the debate on whether stock options have to be expensed, said Victor Raisys, software analyst at investment bank SoundView Technology Group Corp., in San Francisco.

"The debate in the industry right now is the question of whether stock options should be expensed. Microsoft expressed no stance on that. They said that historically they would restate their financials so they have an apples-to-apples comparison," said Raisys, who owns Microsoft stock.

Raisys believes the Stock Award program makes sense as a way to glue employees to Microsoft.

"From a compensation and employee retention perspective it is a positive thing. Certainly it is not a great thing having a bunch of employees running around with a bunch of stock options that are underwater," he said.

Raisys would not predict whether other companies might follow Microsoft's move. He also could not name any other companies that offer a similar program.

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