News > Technology
Microsoft ending options grants
The world's largest software firm announced it will start giving employees stock instead of options.
July 9, 2003: 12:02 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Microsoft announced Tuesday that it will begin awarding actual shares of Microsoft, rather than stock options, to employees starting in September.

The change in the company's compensation practices could drastically alter the technology landscape. Many tech firms rely on stock options, which give a person the right to buy stock at a predetermined price, to reward their employees.

But this practice has sparked intense debate on Wall Street since options are not included as an expense on a company's income statement. That has caused some critics to maintain that this makes tech companies look more profitable than they really are.

Click here for possible impact on Intel

Microsoft said that as a result of the changes in its compensation policy, the company will now expense all equity-based compensation, including previously granted stock options.

During a conference call Tuesday afternoon, Microsoft CFO John Connors said that the company would have more detailed information about the financial impact of these accounting changes when it reports its fiscal fourth quarter and full-year results on July 17. Microsoft would also not comment on rumors that the company is considering a special dividend of more than $10 billion.

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CNNfn's Fred Katayama reports on Microsoft's announcement to end its practice of awarding stock options to its employees and instead start issuing stock awards.

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Michael Cohen, director of research for Pacific American Securities, said that the decision to eliminate options could presage an eventual increase in the company's dividend. Cohen said a special dividend or increase of the common dividend that Microsoft already pays could be another way to reward Microsoft employees, since more of them will be actual owners of Microsoft stock as opposed to options holders.

The company also said that it is working on a plan that would allow employees to sell so-called "underwater" options, options with an exercise price above the current value of the stock, to a third-party financial institution so that employees can receive some value for the options. Microsoft hopes to have this plan in effect by the end of 2003.

Microsoft chairman Bill Gates and CEO Steve Ballmer will not be eligible to receive the stock awards, the company said. Neither executive had ever received stock options.

Shares of Microsoft (MSFT: Research, Estimates) gained 1 percent in regular trading Tuesday to $27.70. The stock dipped slightly in after hours trading according to Island ECN.

One possible reason for the stock's drop after-hours was due to concerns about the effect that the accounting change will have on prior earnings. For example, according to Microsoft's latest quarterly filing with the SEC, the company's fiscal third quarter net income would have been 23.3 percent lower if it had expensed options.

Still, even though the elimination of options would likely lead to a reduction in profits going forward as well since stock will be included as an expense, Matt Kelmon, president of Kelmoore Investment Co., which owns more than 1 million shares of Microsoft, said that the news was good for the tech industry.

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"This is an easier way to make earnings transparent. I'm hoping that other companies will follow suit," Kelmon said.

But a spokesman for chipmaker Intel (INTC: Research, Estimates), one of the biggest proponents of keeping options-related expenses off the books, said that the company reviewed its compensation plan for executives and employees prior to its latest shareholder meeting and concluded it would not make changes. The spokesman would not comment on Microsoft's new plan.

Cisco Systems (CSCO: Research, Estimates) CEO John Chambers told CNNfn that the company would not alter its current policy on stock options. "Broadbased employee stock option plans are the best way to align shareholder and employee goals because employees benefit only when shareholder value is created."  Top of page

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