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Microsoft's better option
Back to sanity: The decision to end the options game is good news for Microsoft and for tech.
July 9, 2003: 12:05 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. (CNN/Money) - The goofy-equity-game method of employee compensation is over. It ended Tuesday afternoon when Microsoft said so. All that's left is the whining. And there'll be plenty.

For at least a year Microsoft has been toying with the idea of expensing its employee stock options. Tuesday, Microsoft went one step further: It's not only going to expense existing stock options, it will stop issuing new ones. Equity compensation will take the form of actual share grants.

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The impact can't be overstated. Stock options started out as a good employee-incentive tool. Then they grew into an entitlement that spoiled employees demanded from their employers. And the accounting treatment of them inflated earnings.

Now Microsoft -- often chided for not being innovative in the technology realm -- is cleverly injecting sanity into the compensation game.

Microsoft will award its employees restricted stock that vests over time, and it will expense those awards as compensation, which they are. (Click here for more on Microsoft's announcement).

In a conference call on Tuesday, CEO Steve Ballmer all but acknowledged Microsoft doesn't expect great gains from its stock price in the next few years. For one thing, Microsoft is exploring an approach that will allow employees to sell their under-water options to a third-party financial interest.

That will relieve the "angst" (Ballmer's word) that many employees are feeling knowing that their older stock options aren't likely to be worth anything for the foreseeable future. Ballmer also said the new stock-award program will benefit employees if the stock grows only modestly, compared to the giants gains it would have taken for employees to make money on their far-out-of-the-money options.

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This third-party plan is huge, by the way. Warren Buffett has been saying for years that it'd be easy to value stock options, answering the critics (like Intel's Craig Barrett) who say options can't be expensed because they can't be properly valued.

Now Microsoft will prove Buffett's point. Someone will pay for Microsoft's employee options. What would you pay for a vested option to buy Microsoft stock at $55, twice its current price? Way less than $55 but far more than zero.

Watch this market for under-water options begin and then sweep over other companies.

Then will come the whining, of course. Ballmer said Microsoft's actions won't be for everyone. Indeed, start-ups will continue to award big chunks of stock options to people who take a risk by going to work for them. Established companies of all shapes of sizes eventually will follow Microsoft's lead, but only after they lament the shift.

This is all an extremely positive development, part of the rationalizing of the way employees get paid in a corporate America gone more than a little nutty by the tech-boom era.

Again, who says Microsoft isn't innovative?


Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.