Microsoft Ceases Stock Option Program

Microsoft will sidestep the sticky issue of whether or not to expense employee stock options by announcing a new stock award program Tuesday that will officially launch in September, CRN has learned.

In a companywide call expected later Tuesday afternoon, Microsoft Chairman Bill Gates, CEO Steve Ballmer and sales chief Kevin Johnson are expected to end the existing stock-option program that made many a millionaire. The new stock award program will hand out company shares--rather than options-- to company executives and employees based on customer satisfaction and customer growth, rather than revenue, sources said.

The move will likely cut Microsoft's bottom line but will please shareholders and some employees whose options are "underwater," or undervalued, sources said.

"This is so Microsoft can bypass whether options should be expensed or not expensed. Going forward, nobody gets new stock options, but instead get shares," said one source familiar with the stock award program, noting that Microsoft would have had to cut the program anyway due to changes in tax benefits. "It'll hurt their margins on paper, but they have to do it anyway so may as well as do it on their own schedule. They're taking a full step. It'll piss off Intel."

Microsoft's top executives--Gates and Ballmer--do not take stock options, a fact that distinguishes Microsoft's senior management from many other companies including Intel and Cisco Systems.

Microsoft and Intel were among the most vocal high-tech companies protesting a concerted push by the financial accounting standards board for companies to expense stock options after the Enron collapse.

However, Microsoft will begin expensing existing stock options granted after September, sources added.

Microsoft is launching the stock award program to eliminate a thorny accounting issue, please shareholders, and give incentives to leaders. A significant portion of the compensation program for the top 600 executives, for example, will be based on increasing the number and satisfaction of customers, not revenue growth.

"They have to grow the number of customers because of Linux and the open-source threat, and they're using this as a way to get people focused on customer satisfaction," the source said.

One investment expert said the issue of expensing stock options has always raised concerns for CEOs and CFOs.

"There's been pressure for companies to expense these things, but they've always fought back and watered down proposed changes to accounting rules. The options don't show up anywhere until they appear on cash flow when they're exercised," said Jeff Matthews, general partner at Ram Partners, a Greenwich, Conn., hedge fund. "The bottom line is [options are] a scam. As Warren Buffet once said, 'If it's not an expense, what is it?' "

He added that expensing stock options is a very unpopular position because of the impact on profits. " A lot of companies would report much lower earnings if they had to expense options," Matthews added. "If that happens, boom, IBM loses a quarter of its earnings. Boom, Dell loses more. All of these companies use options to attract talent without having to pay higher salaries."

BARBARA DARROW contributed to this story.