- The Washington Times - Tuesday, July 8, 2003

From combined dispatches

Microsoft Corp. will start giving shares of stock to employees instead of granting stock options and will record the expenses on its books.

The changes announced yesterday will give employees actual shares of Microsoft stock over time instead of options, which give holders the right to buy stock at a set price. Employees generally are given options to purchase stock at prices tied to the day they start work with Microsoft, the world’s largest software company.

With the stock markets struggling to claw out of a three-year bear market, stock prices are considerably lower than in the late 1990s and 2000 and many have complained their options are worthless.

The company also is working on a way to let staff realize some value from options that can’t be exercised profitably.

The change, which goes into effect in September, will help Microsoft retain and attract high-quality employees, Chief Executive Steve Ballmer said.

“Our compensation philosophy is simple,” he said. “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.

“And we want to ensure that our senior employees’ total compensation is even more closely linked to growth in the number and satisfaction of our customers,” he said.

The Redmond, Wash., software giant announced the change after the close of markets. It finished the regular session up 28 cents at $27.70.

Microsoft’s changes in its stock-compensation program come as debate intensifies over whether companies should be required to deduct the expense of the options from earnings.

In Microsoft’s 2002 annual report, it estimated the impact of deducting the cost of options as an expense. Microsoft said its net income would have been $5.35 billion, a 32 percent drop from the $7.83 billion it reported.

“Since Microsoft is the bellwether, we can expect other technology companies to follow suit,” said Diane Garnick, chief U.S. portfolio strategist at Dresdner Kleinwort Wasserstein. Dresdner Kleinwort is part of Allianz AG, whose Dresdner RCM investment firm owned 77 million shares of Microsoft in March.

As of June 30, 2002, the company had 802 million options outstanding. About 88 percent of Microsoft’s outstanding options have exercise prices that make conversion unprofitable, spokesman Mark Murray said. Most of the profitable options expire next summer.

Microsoft Chief Financial Officer John Connors declined to estimate the options-related costs. The company will provide details when it reports earnings for the quarter ended June 30 on July 17 and in a meeting with analysts July 24.

The new stock grants will vest over five years and will be smaller than the option grants, Microsoft spokeswoman Stacy Drake said.

Mr. Ballmer said in July 2002 that the company was sticking to the way it accounts for options while participating in discussions with computer and software companies about what the industry should do with options.

At the same time, he said some companies in the industry see “something that sounds very, very gloomy that would happen as a consequence” of expensing options. He said he might “not share that view.”

Companies such as Intel Corp. and Dell Computer Corp. have joined the International Employee Stock Options Coalition, a lobbying group supporting bills to delay the Financial Accounting Standards Board’s (FASB) plans to list options as an expense.

“This has got to take the wind out of the sails of people in Congress that are pushing for legislation to delay or derail FASB,” said Robert Willens, tax and accounting analyst for Lehman Brothers Holdings Inc.

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