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Microsoft To Award Stock Instead Of Options

CEO Steve Ballmer says the move is designed to ease employees' concerns about options that are valueless and keep its best employees as it goes forward.
Microsoft is going to start awarding employees shares of its stock instead of stock options--and take the expense of doing so on its books. The move, announced Tuesday by CEO Steve Ballmer during a conference call, is designed to ease employee "angst" over valueless options, and align workers' interests more closely with investors', Ballmer said.

Starting in September, Microsoft will award employees shares of Microsoft stock in which they'll vest over time, instead of offering as compensation options to buy shares at a set price. Following a three-year bear market, many of those options are trading below the price at which employees are allowed to buy them.

That's led to "anxiety or angst" among Microsoft's 50,500 employees, Ballmer said. The company wants to address that liability to recruitment and retention as it moves ahead with development of important products such as the next version of Windows. "The end product we sell is essentially a bunch of ideas," Ballmer said. "It's always good to have the employee base thinking like the shareholders if possible."

Shares of Microsoft closed Tuesday at $27.70, up 28 cents. In March 2000, before the stock market downturn, shares of Microsoft traded above $106. One year ago, the shares traded in the $48 range. The company split its stock 2-for-1 in Feburary. The new plan would make employees "15% to 20% financially better off" at current stock prices, Ballmer said. "It's a long-term plan that lets employees benefit with the long-term success of the company," he said.

Ballmer and chairman Bill Gates won't receive stock awards, just as they've never received options from the company. But about 600 senior Microsoft employees will receive additional performance-based stock awards based on growth in the number of customers Microsoft does business with, and their satisfaction. Microsoft is also exploring a plan--pending approval from the Securities and Exchange Commission--that will let employees sell their under water options to a third-party financial company. That plan wouldn't add to shareholders' costs, Ballmer said.

Perhaps the biggest financial change for Microsoft will be that it will start recording as an expense the cost of the new stock grants. Microsoft, like most technology companies, hasn't expensed the value of options that it's granted. Accounting rules require companies to expense the cost of stock awards immediately.

During the conference call, CFO John Connors said the company wouldn't discuss the financial impact of the move immediately, but would provide more details on July 17, when it reports fourth-quarter earnings.