By
msnbc.com

Microsoft’s decision to abandon its storied stock-option plan marks a watershed for corporate America and could usher in an era that sees companies deploy a broad new array of share-based programs to compensate employees.

Major Market Indices

Even before Microsoft's decision, announced Tuesday, stock options had lost much of the allure they had in the 1990s, when the booming equities market turned thousands of workers into overnight millionaires in technology and other industries. (MSNBC is a joint venture of Microsoft and NBC.)

In those years the broad distribution of stock options to rank-and-file employees was credited with fomenting an entrepreneurial spirit that made the Silicon Valley startup mentality the envy of the industrialized world.

But after a painful three-year bear market, millions of workers are stuck with worthless “underwater” stock options that can no longer provide much incentive. More investors are listening to academic researchers and shareholder activists who question whether options truly increase productivity and align the interests of workers and shareholders. And options have been badly tarnished after being blamed for contributing to an environment in which top executives at companies like Enron and Global Crossing were able to reap enormous riches before the companies collapsed amid revelations of fraudulent accounting.

To top it all off, momentum is building for new accounting rules that would force companies to treat stock options as an expense, a change that could dramatically reduce reported earnings for many technology companies.

Reform-minded activists say the changes are long overdue and need not mean an end to programs that aim to ensure broad shareholder ownership among the lowest levels of the corporate level as well as among top management.

“There are a lot of ways to align the interests of managers and shareholders,” said Douglas Fore, an economist at TIAA-CREF Institute, the research arm of a sprawling organization that manages some $280 billion in investments. “We hope the actions of Microsoft will serve as a wake-up call, not only in that sector but in the United States and around the world, to better align the interests of managers and shareholders.”

TIAA-CREF has long supported the idea of treating options as an expense, a position also famously supported by Federal Reserve Chairman Alan Greenspan, investor Warren Buffett and now Microsoft, which plans to restate earnings from past years to reflect the cost of options granted under its former program.

Big institutional investors like TIAA-CREF complain that current accounting rules favor stock-option grants, which have no impact on earnings, over the performance-based shares that they generally prefer as a way of better aligning the interests of senior executives and shareholders.

Fore said some of the most notorious corporate meltdowns of the past two years might never have happened at all if top executives had not had an incentive to “pump and dump” lucrative stock options.

Corey Rosen, executive director of the National Center for Employee Ownership, agreed, saying, “Executives were getting obscene amounts of options, and it was distorting the way they were running companies.”

But he contends that companies that give out stock options broadly throughout their rank and file tend to perform better than companies that do not share stock ownership. He estimates that up to 10 million U.S. workers hold stock options today, up from 1 million in 1992.

He said it was important to remember that under Microsoft’s new compensation program, the Redmond, Wash.-based software giant will continue to ensure that all its 50,000 employees own company stock as part of their compensation packages.

“All that has changed is the mechanism for delivering it,” Rosen said. “We will see a bigger variety of different types of plans, and this is one of the first and more important instances of doing that. The more important story to me is that Microsoft and others have made a very clear statement: ‘We’re changing the way we are doing it, but we are still doing it. This is important to who we are.’”

Rosen and others said companies already are turning to a broad variety of programs including restricted stock that vests over time, performance-based shares, performance-based restricted shares and “phantom” shares that pay off a specified amount of cash based on the stock price.

The movement to such alternative programs likely will grow substantially if the Financial Accounting Standards Board makes it mandatory for companies to treat options as an expense, thereby leveling the playing field among different forms of stock-based compensation. Many experts expect FASB to put new rules into place sometime in the next year, although the issue is far from decided. The standards boards tried to force companies to expense options a decade ago but was forced to retreat under heavy pressure from technology company lobbying that swayed key members of Congress.

“I still think there is a chance Congress could intervene” again, said Mark Nebergall, executive director of the Software Finance & Tax Executives Council, which lobbies in favor of the existing treatment of options. And he said it is “an open question” whether FASB will be able to come up with formula to adequately estimate the value stock options, which can fluctuate widely depending on the price of the underlying shares.

In any case, dozens of companies that offer broad-based stock options already have agreed to treat them as an expense voluntarily, including American Express, AT&T, Coca-Cola, Home Depot, Merrill Lynch and others.

And Microsoft is hardly the first or only company to have overhauled its stock compensation program. Mercer Human Resource Consulting recently surveyed more than 200 companies, including many of the nation’s biggest, and found that 76 have introduced new forms of equity compensation this year, including restricted stock that vests over time and shares awarded based on performance.

“If everybody follows the new accounting rules, which we expect will be mandatory sometime in 2004 or 2005, all these plans are going to have a cost,” said Peter Oppermann, a senior executive compensation consultant at Mercer.

“It’s not likely that companies are going to completely abandon options,” he said. “It’s more likely going to be a blend, where options will still have a use and other plans that have not been as widely used will be incorporated.”

© 2013 msnbc.com Reprints

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 5.03%
$30K home equity loan FICO 5.68%
$75K home equity loan FICO 4.87%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.15%
17.15%
Source: Bankrate.com