Closing Out an Option
“The Golden Age of stock options is over,” crowed the headline of a front-page Wall Street Journal article on Wednesday that analyzed Microsoft Corp.’s surprise decision to phase out a long-standing, companywide stock options program. Investors can only hope it’s true. Too many corporate executives have manipulated their balance sheets, inflated their earnings and mined stock option gold at shareholder expense.
Microsoft’s unexpected but welcome move will pressure other publicly traded firms to follow suit. One day after Microsoft’s front-page news, for example, automaker DaimlerChrysler acknowledged it was considering a similar change.
But don’t expect California’s technology firms to meekly go along. Silicon Valley executives defend stock options as the most effective way for newer, relatively cash-poor companies to recruit, retain and reward executives and employees. Studies suggest that the big guys, certainly not the drones, got a disproportionate share of benefits from the grants. But tech types argue that options encourage workers and bosses to think like owners. That might be true. But it doesn’t free directors from the obligation to tell shareholders about the ultimate cost of options.
The only way to do that is by getting out of this system, as Microsoft is doing, or to clearly record options as a business cost in company financial statements. This is what shareholders demand and the Financial Accounting Standards Board, which sets accounting rules, seems ready to require.
Microsoft still plans to dangle an enticement before its workers and executives. The company said it would grant employees real stock -- not options -- and record these shares’ cost as a business expense. Employees can redeem, and subsequently sell, the shares if they stay with the firm for an agreed-upon number of years.
Oddly enough, Microsoft was eased into a decision to install a new stock system by its slower-growing share price, which made options held by its 55,000 workers little more than worthless paper. That created “angst” and “anxiety,” Microsoft executives said, as employees lost their dreams of becoming option millionaires.
Silicon Valley keeps lobbying Washington to ensure that options don’t become an endangered species. But Microsoft’s plan seems to meet everyone’s needs. Its managers get an alluring carrot. Employees enjoy a chance to share in the equity wealth. Owners know the price tag up front. If only Windows XP were so simple.
