Microsoft Employees Given New Options

NEW YORK -- In an action sure to reverberate through the high-technology world, software giant Microsoft on Tuesday granted new stock options to all 34,000 full-time employees, aiming to compensate them for the stock's 40 percent dive this year.

Other companies hit by the sudden tech-stock bear market have been mulling similar steps as a way to head off defections of workers for whom options form a big part of their pay package.

Analysts said Microsoft's move may increase the pressure on other tech companies to act. But the move also may provoke an angry reaction from shareholders. "Nobody's doing anything to offset their losses," said Jon Holman, a high-tech executive recruiter in San Francisco, referring to nonemployee shareholders of Microsoft.

Microsoft president Steven Ballmer told employees that they would immediately receive options equal to the number they were awarded last July in their regular annual review, according to spokesman Dan Leach. Employees hired since last July also will receive options matching the number they were awarded upon hiring, he said.

The announcement came one day after Microsoft's shares plunged 16 percent in the wake of the company's downbeat sales forecast last Thursday, and on reports that the government may seek to split Microsoft.

The new options allow employees to purchase Microsoft shares at Monday's close of 66 5/8. The stock was trading above 90 for most of last July, when the bulk of the 1999 options were granted.

Like other Microsoft options, the new ones don't begin to take effect until a year after the award. After one year, one-eighth of the options can be exercised, followed by another one-eighth every six months.

About 70 million new options are being granted, Leach said.

Microsoft said there won't be any impact on the company's earnings. By creating more shares for employees via options that could eventually be exercised, companies can dilute per-share earnings for other shareholders.

Critics have long assailed Microsoft and other companies for declining to treat stock options as an expense, like salaries, in their financial reporting. Were options booked as an expense, many high-tech companies would see their profits reduced significantly or even wiped out, such critics say.

Options are a quick way for employees to get rich when share prices are doubling or tripling, as was the case with many tech stocks early in the year. But in a prolonged stock downturn options may become far less useful as a hiring inducement or motivator for employees.

"New options don't count for much if you don't believe in where the company is going or in the business plan," said Holman.

Still, Microsoft avoided a more controversial practice: repricing existing options to lower the "strike price" at which they can be exercised. That has become more common when the market prices of tech companies' shares have slumped. And it may be the only alternative for many companies whose options now are under water, if the companies would risk too much dilution of earnings by simply issuing more options to workers, or if shareholders haven't authorized additional options.

"Investors hate [option repricing]," said Richard Carlson, an economist with Spectrum Economics in Palo Alto, California.

A key purpose of options is to keep employees focused on raising their company's profitability, he noted. If repricing of options lets the employee win even if the share price falls, "it's not a very impressive incentive plan," he said.