Microsoft is terminating its once-lucrative employee stock-option plan, ending an era of "Microsoft millionaires" and giving current employees a compensation package that's more viable in today's economy. During the go-go 1990s, Microsoft's stock-option plan helped the company lure top talent with the virtual assurance that they would strike it rich. Employees' stock options were tied to the price of Microsoft stock on the day the employee started working for the company, and employees who decided to exercise their options paid that price for the stock. As Microsoft saw huge year-over-year gains throughout the decade, more than 1000 employees cashed in and became millionaires. But after the tech market imploded in the late 1990s, Microsoft's earnings--and stock price--became rather pedestrian. Most of the stock options Microsoft issued to employees in the late 1990s and early 2000s are now "underwater" (i.e., worthless)--a foreign concept to the Porsche- and Lexus-driving employees who were fortunate enough to join the company and cash in stocks years earlier. Something had to give, executives at the company say, or Microsoft would risk losing key employees, many of whom own a vast collection of useless stock options.
"Our compensation philosophy is simple," said Microsoft CEO Steve Ballmer. "We want to be a magnet for the best people by paying smarter. We want to attract and retain employees by offering real ownership and great long-term financial incentives." So Microsoft will terminate its stock-option plan as of September 2003 and begin offering employees shares of Microsoft stock over time instead. Because the company will essentially swallow the cost of that stock, its profits will fall accordingly, but employees won't need to worry about the stock meeting or beating a set option price.
Because Microsoft has 50,000 employees and the largest market cap in the world, analysts and financial officers at other companies will watch the company closely to see how the change affects its profits and ability to retain employees. The changes at Microsoft could ultimately signal similar changes at other high-tech companies, especially in Silicon Valley, in which many companies still use a suddenly dated stock-option purchase plan as a lure for potential employees. Some people believe the change highlights a growing chasm between established companies, such as Microsoft, and small start-ups, which still pop up regularly in Silicon Valley, although not at the same rate as during the Internet boom years. For Microsoft, however, one thing is clear: The company will grow at the more sedate levels befitting a corporate giant rather than the double-digit rates it enjoyed a decade ago.