Stock Options Are Microsoft's `Golden Handcuffs'

So how did all those Microsoft folks become millionaires?

They didn't do it by collecting weekly paychecks. The average annual salary of a Microsoft employee in the United States is about $43,000.

The answer rests with stock options, so-called "golden handcuffs."

Stock options grant employees the right to buy stock at a predetermined price.

Microsoft's program is among the most generous around, granting the vast majority of employees in every department - even line-workers and support staff - options in addition to their regular paychecks.

Though there isn't a simple formula for doling out options - the number depends on the job, job performance and length of employment - the program works something like this:

Say you start work at Microsoft today. You'd either receive the first block of options at the time you start or at the end of your first review period, depending on what's negotiated when you are hired.

Eighteen months after you receive the options, you're eligible to exercise about 25 percent, meaning you can purchase shares of stock at the trading price in effect at the time you received the options. You could then hang on to them or turn around and sell them at market rates.

For example, Microsoft's stock is currently trading at around $90. Let's say you were given 100 options to buy stock at that price. If the market price is $150 on the day you decide to cash in 25 shares, your net gain would be $1,500 (the difference between purchasing 25 shares from the company at $90 a share and selling it back to Microsoft for $150 a share).

After 4 1/4 years, you'd be fully vested and eligible to cash in all your options.

Cashing in 100 options at the $98 price would require you to put up$9,800 in cash to buy the stock. But, in this case, the stock would be worth $15,000, so your net gain would be $5,200.

Obviously, you wouldn't want to exercise your options unless the stock was trading substantially higher than the pre-determined price and until you felt the stock had fully appreciated.

Many employees receive additional blocks of options each year following their annual reviews.

Full-time employees are also eligible at certain times of the year to purchase additional shares at 85 percent of the trading price through a payroll deduction.

The likelihood of becoming a millionaire is far less for employees starting today than it was back in 1981, when Microsoft launched its employee stock option program. That's because the stock is already trading at a high price.

In the early years, according to some reports, many Microsoft employees were granted options for as little as $1.

Microsoft stock closed at $25.75 the first day it started trading. Since that time, the stock has split five times, and the overall price has doubled six times, taking the splits into account.