Microsoft is replacing its employee stock option plan with a programme which will allow employees to earn shares in the company.
The "Stock Award" program will begin in September and is the result of a review of compensation at Microsoft by its top management, with input from employees.
The scheme should help Microsoft attract and retain the best employees. Furthermore, although the plan is open to potentially all of Microsoft's employees, for 600 key executives a significant amount of stock-based compensation will depend on growth in customer numbers and customer satisfaction.
Steve Ballmer, Microsoft's chief executive officer, and chairman and chief software architect Bill Gates will not receive stock awards and also have never received stock options.
Microsoft is also working on a plan to help employees realise some value out of stock options that are worthless because of strike prices above the value of Microsoft's shares. The company is looking at offering employees a way to sell those options to a financial institution.
Stock options were the miracle drug of technology companies at the height of the technology boom, used to fatten compensation packages and attract the best employees. However, with the decline in IT stocks, many of them lost their effectiveness.
As a result of the change in how it compensates employees, starting with its 2004 financial year, Microsoft will start expensing all equity-based compensation, including previously granted stock options. Microsoft started its 2004 fiscal year on 1July, and is scheduled to release its 2003 results on 17 July.
Expensing of stock options has been a hot topic among technology companies. Intel Corp. has been one of the most vocal in opposing the idea, saying it does not make sense because the value of options is uncertain.
Victor Raisys, software analyst at investment bank SoundView Technology Group said the Stock Award programme makes sense as a way to glue employees to Microsoft, although he would not predict whether other companies might follow Microsoft's move.
Joris Evers writes for IDG News Service