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Microsoft will end employee stock options

Posted on: Wednesday, 9 July 2003, 06:00 CDT

Microsoft will end employee stock options

By JOHN MARKOFF AND DAVID LEONHARDT New York Times

Wednesday, July 9, 2003

Moving away from a pay system that showered riches on a generation of entrepreneurs and engineers in hundreds of technology companies, Microsoft said on Tuesday that it would no longer grant stock options, relying instead on actual awards of stock to help pay its 50,000 employees.

The announcement is the clearest sign yet that stock options have lost some of the cachet they held just a few years ago. Microsoft's move also comes as some big investors are putting pressure on companies to award fewer options, calling them a prime example of corporate excess during the 1990s.

Microsoft is an icon of the technology world that was a leader in creating the stock-option business culture still popular in Silicon Valley and elsewhere. The company, the largest software maker on the globe, said it was making the change to calm growing dissatisfaction and angst among employees about their pay, particularly among many of its newer employees who did not benefit from the huge stock market gains of Microsoft's early years. It said it hoped the new system would create the next generation of Microsoft millionaires.

"People have been less happy about the equity compensation side of the equation than almost anything else in their employment here," said Steven Ballmer, Microsoft's chief executive officer.

But with accounting regulators moving to require companies to record stock options as an ordinary business expense, Microsoft may also have seen this move as a way to stay a step ahead of outside pressure to alter its compensation methods.

The shift highlights Microsoft's effort to make the transition from a growth-oriented technology company widely considered one of the most attractive places to work, to a more mature company that must fight to keep talented employees tempted by the riches that they can find at a start-up venture.

Since it was founded in 1975, Microsoft has created more than 1,000 millionaires, according to outside analysts who follow the company. The company currently has about 1.5 billion options outstanding, shared unevenly among its employees. Ballmer and Bill Gates, the company's co-founder and chairman, both own huge quantities of Microsoft shares, but they have never received stock options.

The switch to shares of stock, rather than options, will allow employees to make money on their stock-based pay even when Microsoft's shares are not rising. An option gives its holder the right to buy a share of stock at a fixed price in the future, an extremely valuable right during a bull market but one that becomes less attractive when shares are not rising.

Microsoft shares closed at $27.70 on Tuesday, down sharply from a split-adjusted value of about $113 a share five years ago and even farther below its peak of about $178 a share in March 1999.

Break from the norm

Microsoft's move puts it at odds with the generally held view in Silicon Valley that stock options are an essential tool for assembling highly motivated teams of technology experts who are willing to work long hours for months or years, gambling that in the end the stock market value of their options will justify their efforts.

The culture, economy and mythology of Silicon Valley is largely geared around a system that has permitted companies such as Apple Computer, Netscape and Yahoo to mint thousands of overnight multimillionaires.

Silicon Valley executives said on Tuesday that Microsoft's shift only deepens the rift between start-up and more mature companies. The executives continued to point to difficulties in valuing stock options accurately.

Executives at Intel Corp., one of the Silicon Valley companies that has adamantly opposed the idea of expensing stock options, said the Microsoft decision did not alter their opposition to the idea.

Stock options remain the biggest form of pay for top executives at most large companies, having surged in popularity during the long bull market from the late 1980s until 2000. Outside of the technology industry, however, relatively few rank-and-file workers receive them.

The most recent Labor Department survey found that 1.7% of private-sector workers received options in 1999. Overall, between 7 million and 10 million Americans hold options, according to the National Center for Employee Ownership in Oakland, Calif.

But that era may be ending even in much of the high tech world.

"We had lifetime job security in the '60s, we had the corporate car in the '70s, flextime and day care in the '80s and stock options in the '90s," said Bob Austrian, managing director at Banc of America Securities in San Francisco. "Now we're clearly moving on."

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