When Microsoft announced its plans to transition from the "New Economy" to the "Old Economy" with the discontinuation of the most successful stock-option plan in corporate history, analysts hailed the move as a huge long-term win for investors. Although giving employees real stock in the company rather than options will cost Microsoft billions of dollars in the short term, the positive effects on the company's workers and its ability to retain employees will be immeasurable.
On July 17, Microsoft will divulge exactly how this change will affect previously reported earnings. Whatever the outcome, however, analysts at Banc of America Securities, CIBC World Markets, Merrill Lynch, and other analyst companies agree that Microsoft is making the right move and will recoup the cost of stock grants over the long term. Intriguingly, Microsoft's top 600 executives will receive stock grants according to different rules than other employees: Their grants will vest over a 5-year period and are based solely on customer satisfaction and company performance. This decision will encourage those executives to ensure that Microsoft's products are of the highest-possible quality.
Change comes hard for Microsoft, although the company likes to exaggerate its ability to "turn on a dime." During the software giant's historic antitrust trial, analysts, competitors, and the court system routinely criticized the company for acting like a bold Internet start-up when, in fact, Microsoft is a goliath that dominates the industry. Now, slowed growth and sagging stock prices might have accomplished what the critics couldn't, permanently disrupting Microsoft's hyper-growth and forcing the company to act its age. In recent years, Microsoft has made various small behavioral changes to ensure that its employees act responsibly, more accurately reflecting the company's maturity and size. This week's announcement is the most dramatic change yet.
But Microsoft is still an economic power unmatched in any industry. Currently the wealthiest corporation on earth, Microsoft has more than 50,000 employees and a $46 billion cash horde and rakes in $1 billion per month, largely from the continued success of Windows and Microsoft Office. This money helps the company finance products such as MSN, the Xbox, and smart phones, which continue to lose hundreds of millions of dollars each year. Because Microsoft can afford to plug away at products that other companies have been forced to abandon, the company hopes to become a player in future markets for connected devices, high-speed Internet services, and other markets not rooted in the PC industry.