Mr Alexander Levin, a Microsoft worker for nearly a decade, once lived the dream of stock option wealth - though he says he never expected to become a millionaire.
"Everything went up and it was great - for a while," he says. Like many others, he sold his shares as his options matured: why hold actual stock in the firm when he had many newer options already?
These days, Mr Levin, a technical manager in the firm's operations and technology group, has other things on his mind.
With the economy struggling, "it's very good to be employed", he says. "It's very good to have a paycheck and medical insurance. I'm a married man. I'm 47."
Microsoft, like Mr Levin, is reaching middle age. On Tuesday, chief executive Mr Steve Ballmer shocked the tech world with the news that Microsoft would no longer hand out stock options.
The legendary Microsoft Millionaires will become a thing of the past, says Ms Paula Todd, an executive compensation expert at Towers Perrin.
While the Microsoft switch has been celebrated as a blow for better corporate governance, Mr Ballmer is adamant that, for staff, stock options no longer work.
He says holding restricted stock simply gives employees "a more balanced range of returns" than holding stock options. The volatility of options, which can make workers rich when share prices soar but leave them with nothing when the stock market falls, has created too much angst in the firm. This can be seen from the profits staff have made from their options, at least on paper. From more than $16 billion (€14.1 billion) in 2000, option profits tumbled to less than $5 billion last year.
One source of anguish for many tech industry workers has been the requirement to pay tax on option profits when they exercise the options, even if they do not sell the stock. For workers who chose to hold stock, only to see the market collapse, the tax payments became a painful cash drain.
Ironically, Microsoft's corporate coffers benefited from those tax payments, even if some workers suffered. US firms receive tax credits to offset the tax paid by staff, boosting cash flow. At Microsoft, those credits peaked at more than $5.5 billion in 2000.
Holding restricted stock rather than options should provide more incentive for workers to keep a stake in the firm rather than cashing in their shares, says Mr Ballmer. For that reason, he denied the switch represented a move away from using equity-based incentives.
But workers will get less stock than they once received in options. That will reduce the dilution to the firm's earnings per share caused by use of stock benefits, lowering the stock buy-backs Microsoft has to mount every year. That will reduce the impact from the loss of the annual stock option tax credit, which last year totalled $1.6 billion.
Giving workers less stock is a reflection of the fact that stock has a value when it is awarded, while options depend on a rise in the share price, says Mr Ballmer.
While ensuring that workers have a more direct interest in Microsoft's stock price, the shift will reduce the potential for them to become seriously rich. - (Financial Times Service)
