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Culture Shock


By David Rubinstein
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August 1, 2003 —  (Page 1 of 3)
Change happens. Then, it is left to the chroniclers and pundits of the day to determine if the change was for the better, or for the worse.

Microsoft's decision last month to end its employee stock-option program certainly marks a change in the high-tech compensation landscape. As one of the companies that led the way in creating instant millionaires in the go-go days of the 1990s, this move is a bold one.

After all, Microsoft created what has been reported as thousands of millionaires this way, by enticing otherwise underpaid techies to join up and stick with the company, with the possibility of striking it rich. By one account, Microsoft employees cashed in about US$17 billion in options in 2000, and took another $6 billion the following year. (An interesting aside is that neither Bill Gates nor Steve Ballmer ever received options, claiming that the amount of company stock they owned was enough to ensure that they would give their best efforts every day.)

But was Microsoft's move away from options reactive or pro-active, and will other industry heavyweights follow suit? In light of the recent accounting scandals rocking boardrooms around the country, and the fictional Gordon Gekko's mantra of "Greed is good" all but washed from the mouths of real-world CEOs, Microsoft can stake out a position among the leaders in the new era of responsible corporate governance.

While many companies have said they will begin to expense options, none has played such a prominent role in creating the options culture that helped drive the high-tech industry to dizzying heights-only, of course, to see it come crashing down around them.

There is a ton of pressure coming down on companies to report stock options as expenses. In fact, a look at some of our industry bellwethers shows that much of their reported profits would be drastically reduced if these option redemptions were required to be expensed.

One published report attributed to financial services firm UBS Warburg indicated that Cisco's profits would have been cut by more than half, Intel's by about a third, and Microsoft's by about a quarter, if they reported the cashing of options as expenses. That would also deflate the stock price, and make the company less appealing to investors.



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