SEATTLE — Microsoft Corp., the granddaddy of stock-option compensation, will abandon the practice and instead give shares outright to all employees.
Under its new policy, Microsoft will also start recording all stock compensation, including outstanding options, as an expense. The company will provide comparable figures from previous years, potentially knocking down profits by billions of dollars.
The change in stock compensation means employees will automatically receive actual shares of Microsoft stock over time instead of options — the right to purchase stock at a set price.
Typically outright stock awards, known as restricted stock, have been reserved to top executives’ compensation. Microsoft said the new policy would be in effect in September for its approximately 50,000 employees.
For options to be valuable, the stock must trade above the “exercise price.” Restricted stock is essentially free money, regardless of the stock’s performance.
With the stock markets struggling to claw out of a three-year bear market, stock prices are considerably lower than in the late 1990s and 2000 — when these options were granted — and many employees’ options are now worthless. Microsoft said it is also working on a plan that allows employees to sell these “underwater” options to a third-party financial institution.
Microsoft chief executive Steve Ballmer said the change will help Microsoft retain and attract high-quality employees. Analysts said other companies might follow suit, but Ballmer said Microsoft wasn’t trying to make “some grand statement.”
“Our compensation philosophy is simple,” Ballmer said. “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.”
Microsoft gave a glimpse of how expensive options can be in its 2002 annual report, estimating that deducting the cost of options would have reduced net income 32 percent from the $7.83 billion it reported to $5.35 billion.
Microsoft’s changes in its stock compensation program comes as debate intensifies over whether companies should be required to deduct the expense of the options from earnings.
Some, including billionaire investor Warren Buffett and Federal Reserve Chairman Alan Greenspan, have advocated expensing stock options, and accounting rulemakers are considering making that mandatory. How companies will value the options remains a major sticking point.
With Microsoft long viewed as a leader in stock compensation policies, the change could set a standard for other companies, said Brendan Barnicle, an analyst with Pacific Crest Securities.
The stock awards, like stock options, would vest over a five-year time period.
As part of the changes, Microsoft will also tie stock awards for its top 600 or so executives to the growth in its customer base and customer satisfaction.