Microsoft To Award Employees Stock

Rewriting the handbook on employee compensation for tech firms, Microsoft
Tuesday struck the term “stock options” and replaced it
with actual stock.

Microsoft Chief Executive Steve Ballmer said the move answers employee
“angst” over its compensation approach with a sweeping shift in employee
compensation which will see employees awarded with actual stock rather than
stock options.

“Over the course of the past several years, it has been clear from input
we’ve been getting from our employees…that there was essentially a sense
of anxiety or angst over our compensation approach,” Ballmer said in a conference call Tuesday afternoon.

Ballmer said that based on this input, the company set about looking for a
“smarter way of compensating our people. A way that would make them feel
even more excited about their financial deal here at Microsoft and at the
same time be something at least as good for our shareholders.”

Ballmer said the company settled on granting its employees actual stock
awards that will vest over a five-year period because it “will help the
company continue to attract and retain the best employees, and better align
their interests with those of our shareholders. These changes are a key
step in our ongoing effort to position Microsoft for long-term success.”

The plan calls for Microsoft employees to begin receiving stock awards in
place of options beginning in September 2003. The company will no longer
offer options, and is also in the process of instituting a program under
which employees with options that are currently “underwater” (in other
words, granted at a higher price than the current stock price) will have
the option of selling those options to a third-party financial institution
in order to realize some value on those options.

That aspect of the plan will be optional. Ballmer said the company is working through the details now, both with the U.S. Securities and Exchange Commission and with third
parties. The company expects to implement that portion of the plan by the end of 2003.

Microsoft’s senior employees, numbering about 600 or so, will see their
stock awards based on growth in customer numbers and satisfaction, which
Ballmer said would tie them even more closely with shareholder interests.
He noted that neither he, nor Microsoft Chairman and Chief Software
Architect Bill Gates, will receive stock awards.

The company also noted that the new compensation approach requires it to
begin expensing all equity-based compensation, including previously-granted
stock options. That means it will be forced to restate past earnings.

“Because stock awards must be expensed as they vest, we will include the
cost of all equity-based compensation in both future and prior years’
financial statements to preserve year-over-year comparability,” said John
Connors, chief financial officer and senior vice president, finance and

“We agree with others in our industry that there’s no
one-size-fits-all approach when it comes to equity compensation programs
and the resultant accounting for them. Every company has a unique set of
circumstances, and this is the appropriate accounting treatment for our new
compensation plan.”

Ballmer also noted that other players in the industry are likely to be
watching Microsoft’s move closely. “We’re enthusiastic about the changes we’re making for our own company,” he said. “We recognize our leadership position in the industry and people will look at us in that context.”

But he said no solution fits all companies and each firm will choose a
compensation method that is best suited to its employees and shareholders.

The announcement comes on the heels of widespread speculation that
Microsoft is considering the idea of granting its shareholders a one-time, $10 billion cash dividend. The company declared its very first
cash dividend
in its history back in January.

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