Microsoft shock adds to jitters

PROPER ACCOUNTING: The software company's decision to abandon stock options and begin expensing compensation could be a turning point in battle for confidence

Taipei Times

Monday, Jul 14, 2003, Page 12

Corporate America's struggle to win back investors jaded by financial scandal got a jolt last week when Microsoft Corp said it would jettison stock options, once the golden egg of the Internet age but now a tarnished symbol of fat-cat greed.

Starting in September, Microsoft will abandon the practice of awarding stock options to executives and workers, giving them the chance to earn actual shares instead, the company said July 8.

Microsoft added that it would account for stock-based compensation as an expense on its balance sheet for the next fiscal year, which began July 1.

The company took the decision after employees expressed "angst" about the options plan, chief executive Steve Ballmer told reporters.

Stock options give bearers the right to buy shares at a fixed price over a specified period, essentially gambling that the price will have risen by the time they convert the options into actual shares, which they then keep or sell.

In recent years, however, Microsoft shares have fallen.

The announcement also came amid pressure from investors and regulators alarmed by a plague of US corporate scandals involving management chicanery and revelations that bosses had enriched themselves even as they laid off workers and misled shareholders savaged by the markets.

"All firms are now looked at with suspicion, so what might be considered the smarter ones are trying to get out ahead of that," said Randall Dodd, director of the Washington-based research group Financial Policy Forum.

Last month, the US Securities and Exchange Commission ordered companies listed on the New York Stock Exchange and NASDAQ stock market to get approval from shareholders before granting stock options to executives and directors.

The Financial Accounting Standards Board, the setter of corporate accountants' rules, also is moving to force companies to expense stock options.

Big business, however, has successfully lobbied US lawmakers to introduce bills that would block enforcement of any such rule for three years.

Dodd, who opposes expensing, said firms are loath to give up options because, while they do not book them as expenses, companies do claim options as tax deductions when employees convert or cash them.

Thus, in 2000, Microsoft and five other top US tech firms paid no federal tax because they deducted some US$10 billion in exercised options.

The US labor movement, which is leading a shareholder assault on what it sees as executive excess, seized on Microsoft's announcement to turn up the heat on other firms.

"Microsoft's announcement establishes an important executive compensation precedent," Richard Trumka, secretary-treasurer of the 13-million-member AFL-CIO federation of labor unions, wrote to the chief executives of a dozen leading firms on July 9.

Labor-affiliated pension funds with US$400 billion in combined assets have filed some 200 out of a record 300 shareholder proposals on executive pay-related issues, according to the Washington-based advisory group Investor Responsibility Research Center.

Fanning workers' and investors' ire, the center said in April that chief executives of the top 100 US firms earned an average of US$1,017 per hour in last year, compared with US$16.23 for the average worker.

Stock options were excluded from the comparison but would further widen the boss-worker pay gulf, already the largest in the industrialised world, it said.

Union-sponsored proposals specifically asking management to expense stock options have received majority votes at this year's annual shareholder meetings of 26 US companies, according to the AFL-CIO.

Most shareholder proposals are not legally binding, but investors say strong support puts pressure on companies to change their ways.

The threat of a vote moved 11 firms, including telecommunications providers Verizon and Sprint, to offer to expense options if unions withdrew their proposals.

Supporters of expensing say firms have used stock options to muddy their books and inflate their earnings but would stop showering them upon employees if they were forced to count options as a cost, like salaries.

Opponents of expensing counter that options have enabled startups with little cash to attract workers and executives by supplementing modest salaries with incentives they can cash in later.

Such was the case with Microsoft, which gave options to all of its 50,000-plus employees, making millionaires of thousands of them -- at least before the dot-com bubble began to burst in the late 1990s.