WSJ Out of the Money on Microsoft’s Stock Options

by | Jul 13, 2003

The financial press is grave-dancing on Microsoft’s decision to no longer award stock options to employees — and instead to award shares of stock itself. A Wall Street Journal column by Jessie Eisenger crows “Microsoft, once the bullying monopolist, is trying to become a good corporate citizen.” A front pager by Robert Guth and Joanne […]

The financial press is grave-dancing on Microsoft’s decision to no longer award stock options to employees — and instead to award shares of stock itself.

A Wall Street Journal column by Jessie Eisenger crows “Microsoft, once the bullying monopolist, is trying to become a good corporate citizen.” A front pager by Robert Guth and Joanne Lublin crows,

“The golden age of stock options is over… The company’s decision comes amid mounting pressures on stock options, long a pay perk for senior executives. More recently companies began doling them out to rank-and-file employees, making them an iconic trapping of wealth during the boom of the 1990s.”

Why does it make a company a “good corporate citizen” to not grant stock options? Dow Jones & Company, the publisher of the Wall Street Journal, grants them (although the column does not disclose that). Is Mother Dow a “bad corporate citizen?”

Since when are options awarded as compensation for the time and talent of senior executives a mere “pay perk?” I assume Dow Jones CEO Peter R. Kann doesn’t see it that way (and the story neglects to mention that Microsoft founders Bill Gates and Steve Ballmer have never once received options, perks or not).

Why does compensating rank-and-file employees with option — the same way as executives — constitute “doling them out”? Perhaps Mr. Guth and Ms. Lublin don’t feel the quality of work like this entitles them to anything more than their meager salaries, and would see options granted to them as mere charity.

And how is it that the reward for successful efforts and patient risk-bearing is merely an “iconic trapping”? Are Mr. Guth and Ms. Lublin just a teensy bit envious?

Microsoft also announced that it will henceforth record the expense of its existing stock options on its income statement. In the past, like the vast majority of companies, it has instead only disclosed the expense in a pro forma table in the notes to the financial statement. But for the Journal, that makes Microsoft a “holdout.” Well, then Dow Jones & Company is a “holdout” too. It doesn’t record stock option expense on its income statement (but the story neglects to mention that).

So why is Microsoft cutting off the “pay perk” and stopping “doling them out” if not to be a “good corporate citizen”?

Simple — it’s trying to optimize the way it rewards its investors and pays its employees in light of the new tax law that sharply reduces the tax on dividends. In a new world where its suddenly tax-smart for Microsoft to start paying a big dividend — and maybe even pay out some or all of its $46 billion cash hoard — options just don’t make sense anymore (because the value of options is eroded whenever a company pays out a dividend).

The answer: make option-holders into stockholders. The Journal story never even mentions this consideration.

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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