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July 09, 2003
Microsoft Drops Stock Options in Favor of Stock

Microsoft Corp. has announced it will no longer give employees stock options - the benefit that created so many "Microsoft millionaires" back when the Redmond, Wash., company led the tech boom.

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Instead, Microsoft will grant shares outright.

Granting stock options - rights to buy stock at a set price - was a great incentive when Microsoft went through its period of explosive growth. But in the past few years, the company has grappled with the maturing of its business, including slower growth. That in tuirn has left employees with "underwater" options; current stock prices are lower than the price for exercising the options.

"This is no longer a hyper-growth company," Brad Reback, executive director of CIBC World Markets, told the Associated Press. "This is a large-cap growth stock. I think the gains in the stock from here on will be much more measured."

For workers, the change amounts to exchanging growth potential for stability. Although they'll automatically receive free shares, they will receive fewer than they would have been eligible to buy under the former program. The lower rewards are also lower-risk.

Still, it's "a good deal for employees," said Reback. "You now have a guarantee as opposed to a lottery ticket."

Microsoft became the envy of American business by reporting 50 percent quarterly profit increases, billions of dollars in cash reserves, and soaring stock prices; a single share purchased for $21 in its 1986 stock-market debut is now worth nearly $8,000.

But the company has been slowing down of late, the AP notes. Although it still pulls in billions of dollars in profits each year and has a cash hoard of $46 billion, Microsoft is not going to repeat the acrobatic performances of its younger years, analysts said.

For Microsoft employees, the changes of the past three years have been dramatic. In 1999, those working in Washington state collectively earned about $8 billion in income from exercising options priced at lower levels than the stock's trading price at that time, said Seattle economist Dick Conway, a principal in Dick Conway and Associates.

In 2002, that figure was just about $3 billion, he said.

John Connors, Microsoft's chief financial officer, told the AP that the change is not necessarily due to the flagging stock price.

"It's really more a function of having a more predictable and stable compensation plan for employees," he said.

Source: The Associated Press, via Yahoo!

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