Microsoft drops stock option compensation

US software company Microsoft has broken ranks with other leading technology providers by announcing its intention to end employee compensation using stock options.

Starting in September, Microsoft employees will be awarded stock instead of stock options. Microsoft will also start factoring in all equity-based compensation, including previously granted stock options, from its 2004 fiscal year. Microsoft said a significant portion of stock-based compensation for more than 600 of its "senior leaders" will depend on growth in the number and satisfaction of its customers.

“We want to attract and retain employees by offering real ownership and great long-term financial incentives,” said Steve Balmer, Microsoft’s chief executive. “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.”

Microsoft’s move flies in the face of other leading technology providers, such as Sun Microsystems and Apple, which have robustly defended the role of option-based compensation. These companies have fought proposals to change accounting standards to require that stock options be treated as an expense and fair-valued.

“We agree with others in our industry that there’s no one-size-fits-all approach when it comes to equity compensation programmes and the resultant accounting for them,” commented John Connors, Microsoft’s chief financial officer. “Every company has a unique set of circumstances and this is the appropriate accounting treatment for our new compensation plan.”

Investor demand for options to be accounted for as expenses got a boost last year when rating agency Standard & Poor’s began factoring in stock option expenses to determine core earnings. This, together with political pressure following US corporate accounting scandals, and moves by UK-based accounting standards setter the International Accounting Standards Board (IASB) to make treating stock options as an expense a requirement, led many US companies to voluntarily adopt the practice. Coca-Cola, Ford Motor Company and General Electric are just some of the companies that now treat employee stock options as an expense.