updated 11/7/2004 3:23:34 PM ET 2004-11-07T20:23:34

For Microsoft Corp. shareholders, the holidays will likely come early this year in the form of a one-time $3 dividend that’s part of the company’s plan to return some of its $64.4 billion cash horde back to shareholders.

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But Microsoft won’t hand out the cash unless shareholders allow the company to alter its stock compensation plans, so employees who hold stock options and stock awards aren’t hurt by the dividend payout. Shareholders are being asked to approve the proposals at Tuesday’s annual meeting. (MSNBC is a Microsoft-NBC joint venture.)

The move underscores that Microsoft, while eager to gratify its shareholders, also is eager not to alienate employees. Many of Microsoft’s thousands of workers expect to get considerable wealth from Microsoft’s stock compensation programs, and have seen those hopes soured as Microsoft’s once skyrocketing stock price has remained relatively flat over the past few years.

“The days of the Microsoft millionaire are over and it’s never going to be like it was in the 1990s, but it’s still a very important part of employee compensation. So Microsoft is making sure that as they’re pleasing shareholders, they’re not hurting employees,” said analyst Matt Rosoff with independent researchers Directions on Microsoft. “

He believes the proposal is sure to pass — especially since shareholders don’t get the dividend if they don’t agree to it.

Strike-price formula sought
A one-time dividend can be harmful to people holding stock options or stock grants because the company’s stock price is expected to fall by the amount of the dividend. For shareholders, that drop is counterbalanced by the dividend itself, but people who hold only grants or options don’t get the dividend.

To make up for that loss, Microsoft is asking shareholders for permission to employ a formula that would decrease the strike price — the price at which stock can be bought at a certain point in the future — of employees’ options while also increasing the number of options the employee receives. Microsoft recently switched from offering stock options to stock grants; employees who hold stock grants would simply see the amount of the stock grant increased to counterbalance the expected stock price drop.

Redmond-based Microsoft says it’s the same formula that would be used to adjust stock compensation if there is a stock split or similar event. And it says keeping employees from being disadvantaged ultimately benefits shareholders as well.

“We want to be all-around fair,” said Colleen Healy, senior director with Microsoft’s investor relations group. “We want to be fair to the shareholders and the employees, and it’s good for shareholders for us to treat our employees fairly.”

If the proposal is approved, Microsoft will pay out the dividend on Dec. 2 to shareholders of record as of Nov. 17.

‘An issue of fairness’
Menachem Brenner, a finance professor with New York University’s Stern School of Business, said he hasn’t seen many cases of companies asking to adjust stock compensation plans to account for a one-time dividend. But he thinks it’s the right thing to do.

“They used the word ’fair,’ and it really is an issue of fairness,” he said.

Roni Michaely, a finance professor with Cornell University’s Johnson School of Management, agreed stock option and grant holders should be compensated for a one-time dividend. But he would have preferred to see Microsoft simply drop the strike price of its options by $3. Among other things, he said the formula Microsoft is proposing will dilute the stock base at a potential cost to regular shareholders.

“It’s taking away from the shareholder,” he said.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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