Ballmer breaks Silicon valley taboo

Ballmer breaks Silicon valley taboo

Tuesday July 8, 7:55 pm ET

By Richard Waters and Tom Foremski in San Francisco

For the second time this year, Microsoft has shown signs of encroaching corporate middle age – and delivered a wake-up call to the rest of the technology industry in the process.

First came a decision to pay a dividend to its shareholders. As well as signalling that its early years of go-go growth were over, the move put pressure on other tech companies to justify why they did not pay dividends as well.

ADVERTISEMENT

On Tuesday, it delivered an even bigger challenge by responding to the clamour for the practice of listing stock options as expenses that followed various accounting scandals in corporate America.

Most executives in Silicon Valley believe stock options to be a core of their industry’s risk-and-reward culture. For the world’s biggest software maker to end its use of them is akin to breaching a taboo.

As part of the shift toward issuing ordinary shares to its employees instead of options, the company said it would begin to account for the benefits as an expense against profits. By also doing so with the options it has issued in the past, Microsoft has broken ranks with the tech industry’s resistance to this accounting practice.

Deducting the costs of options in the past would have wiped nearly $9bn from Microsoft’s operating profits over the past three years.

No wonder other companies were quick to brush off the development.

Intel said companies would “adopt a range of different compensation packages and that is the way it should be”, adding that the leading chipmaker would not abandon options.

Yet Microsoft’s dominance of the software business will inevitably make its compensation practices a model for others – a fact that other tech executives have explicity acknowledged in the past, and which Steve Ballmer, Microsoft’s chief executive, alluded to on Tuesday.

The change is also likely to add indirectly to Microsoft’s steadily mounting cash pile, which stood at $46bn at the end of March.

The company said that the number of shares issued to employees would be lower than the number of options it has handed out in the past, though it refused to give further details.

As a result, it will need to buy back fewer shares to prevent dilution to its earnings per share. Microsoft has spent $17bn in buy backs in its last three fiscal years.

For the company’s employees, meanwhile, the change in policy should ease some of the pain that can come from an extended bear market, though it may also reduce the chances of becoming seriously rich.

“Underwater” stock options – those that carry an exercise price above the current share price – will become a thing of the past.

This was the main factor that prompted Microsoft to end the use of options, according to the company. At least 632m options – or 79 per cent of all those outstanding – are currently underwater, according to the company’s last annual report. Some carry excercise prices as high as $119, compared to a current share price of $27.70.

While the new stock awards will be less volatile than the option benefits, there will be fewer of them. By Mr Ballmer’s calculation, the average employee might be 10-15 per cent worse off if the company’s share price rises – although he did not provide details of this calculation.

But while huge profits earned by employees during Microsoft’s first two decades as a public company seem a thing of the past it does not necessarily mean the death of the option in Silicon Valley.

Willie Tejada, vice- president of business development at Netli, a young internet technology company, said: “The stock option packages in start-ups will have potentially a much greater value and will increase in value at a faster rate than say Microsoft’s shares.”