Microsoft chooses to scrap stock-options program
The company will now give employees outright stock awards, rather than options to buy the stock at a fixed price.
Options helped create thousands of millionaires in the 1990s, but the value of their assets has fallen with Microsoft’s stock. Around half of the outstanding options are now worthless, creating what Chief Executive Steve Ballmer called “angst” among employees.
“Angst is bad,”’ he said. “Even if people all stay here and work, I need them focused 100 percent on the right issues and not worrying about, you know, how they’re going to send their children to college or how they’re going to do whatever it is they're going to do.”
Instead of options, which give holders the right to purchase stock at a later date at a fixed price, employees will now get the actual stock itself, but they will receive fewer shares when they are hired and at their annual performance reviews.
“It feels to me like the leadership of our company is saying we’ve become more of a mature company — that we’ll have more gradual, steady growth — vs. more of a startup, rapid-growth company,’’ said Louie Gracey, a senior director in Microsoft’s global platforms group, who helped managers develop the program.
Gracey expects employees will be motivated by the change, since they can plan and count on the stock awards instead of speculate about the potential value of their options.
Meanwhile, pressure is growing for corporate America to include the expense of options in their financial statements. Many already do but technology companies that rely heavily on options to compensate employees have resisted because the accounting change could wipe out billions of reported earnings.
Microsoft will report the stock awards as an expense in its income statements, and the company will restate recent profit figures to factor in option expenses. Until now it has listed those expenses in footnotes.
For employees holding recent options that can’t be cashed in, Microsoft is setting up a program that would allow them to sell their options to an investment bank for a few dollars apiece. Employees can hold onto the options in hopes the stock rises enough to make them valuable, or it can let the bank — J.P. Morgan Chase — take that gamble.
Upon hiring and at their annual performance reviews, Microsoft employees have received options to buy stock at a fixed price. The options vest over four years and must be exercised in seven to 10 years.
Options become valuable if the stock rises above the price at which they are fixed. When the stock price was doubling over and over again in the mid-1990s, many employees were suddenly multimillionaires.
But if the stock price is flat or declines, options have little or no value.
Now employees will receive outright stock grants. The shares will vest over five years, rather than four, but they are guaranteed to be worth as much as the stock.
For the state of Washington, the change to stock awards should make it easier for government officials to predict personal income. Microsoft briefed state officials yesterday.
“The impression that I had after the briefing yesterday was that it’s good for the employees and if it is good for the employees it’s good for the company and the whole economy,’’ said Chang Mook Sohn, the state’s chief economist.
Microsoft was the single largest contributor to economic growth in Washington in the 1990s, according to a report the company commissioned from Seattle economist Dick Conway. Its outsized effect was largely the result of the wealth created by stock options.
In 2001, Microsoft employees in the state made $2.4 billion in wages and $3.5 billion in stock option income, and from 1999 to 2001 the company was responsible for 28.3 percent of King County’s employment growth.
Brier Dudley: 206-515-5687 or bdudley@seattletimes.com