Keeping options open

9 July 2003 By Hugo Dixon Follow @hugodixon

Microsoft s move to nix options for its employees may spark a trend. It has, after all, been the poster child of the options boom. But just as it was wrong to see options as a panacea during the bubble, it is also a mistake to think they have no role today.

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Microsoft is abandoning the award of stock options to employees and will, instead, grant them restricted shares.

The software giant said it was making the switch, which will take place in September, because many of the options granted in recent years are out of the money following a decline in its share price. Steve Ballmer, chief executive, said this was creating angst among employees.

Microsoft is also going to allow employees with outofthemoney options to sell them. The scheme is being arranged by JP Morgan. Microsoft has 1.6bn options as of June 30, 2002. The strike prices ranges from 40 cents to $59.56 – with an average of $26.88. Its stock closed at $27.70 on Tuesday.

Restricted shares will be granted to all 50,000 Microsoft employees. They will vest over a five year period. The stock awards to Microsoft's top 600 managers will depend significantly on customer satisfaction.

Microsoft will expense the stock awards as they vest. Any stock options granted in the past will also be expensed. Microsoft estimated that its net income in the nine months to end March would have been $6.1bn rather than $8.1bn if it had expensed options.

Separately, DaimlerChrysler said it was considering ending its stock option program and granting executives phantom stocks instead.

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