Microsoft dumps employee stock options

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From September, staff at the software giant will be granted stock awards, giving them the opportunity to earn actual shares of Microsoft stock over time, rather than options that give employees the right to purchase stock at a set price.

In a statement, chief executive Steve Ballmer explained that the change would help the company continue to attract and retain the best employees, and better align their interests with those of the company’s shareholders.

‘Our compensation philosophy is simple: we want to be a magnet for the best people by paying smarter. We want to attract and retain employees by offering real ownership and great long-term financial incentives,’ he said.

‘And we want to ensure that our senior employees’ total compensation is even more closely linked to growth in the number and satisfaction of our customers.’

As part of the changes, a significant portion of stock-based compensation for more than 600 of Microsoft’s senior staff will be linked to growth in the number of customers and customer satisfaction.

The practice of allowing staff to purchase stocks in the future at a fixed price made many employees millionaires in the boom years of the 1990s.

But the decline in Microsoft’s share price over the past few years has made many of the outstanding options worthless.

Microsoft is also developing a plan to allow employees to realise some value on the portion of their stock options that are currently ‘underwater’ by selling their options to a third-party financial institution.

If approved, the company expects to implement this plan by the end of 2003.

Richard Cockman, a partner at human resources consultancy Watson Wyatt, suggested that Microsoft’s decision highlighted a trend among IT companies both in the UK and the US.

‘Stock options only work if share prices go up, and there are a lot of stock options underwater and not working as a retention tool,’ he explained.

‘Stock options also cost money and accounting standards boards on both sides of the Atlantic are saying that they will now have to be charged against profit.

‘If it’s going to hit your profit-and-loss account, companies are asking whether there’s a better way of doing it.’

Cockman pointed out that the benefit of offering shares is that, even if the price goes down, they are still worth something.

‘But I expect companies will use a portfolio of compensation plans including restricted shares, performance-related shares and share options,’ he said.

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