Microsoft Corp. announced on Tuesday that it will stop granting stock options to its executives and employees. Instead, employees will be granted actual shares of Microsoft stock.
In the early 1990's, stock options were an attractive offer for many employees. However for many now, recent stock prices are worthless since the burst of the tech bubble.
What does this mean for the broader debate over stock options and whether or not public companies should use options to compensate their employees?
Harris Miller, president of Information Technology Association Of America, will be online Wednesday, July 9 at 1 p.m. ET, to discuss how this decision will impact the tech industry.
The transcript follows.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questionsp>________________________________________________
washingtonpost.com:
Hello everyone and thanks for joining us today. Could you start us off by giving a brief history of the stock option debate and Microsoft's role in it?
Harris Miller: Most of the stock option debate has centered on the issue of whether stock options granted by companies to their employees should be treated as an expense each year. Several years ago, the Financial Accounting Standards Board proposed requiring all companies to "expense" options. Industry generally, and the IT industry specifically, strongly opposed the FASB idea because a) stock options are very important to recruiting and retaining key employees, and b) the accurate valuation of stock options is virtually impossible to do. Based on opposition from industry and key Members of Congress, FASB decided in the mid-90's to back away from its proposal to require expensing stock options to an alternate proposal, currently in effect, to require companies that provide options to include that information in a footnote in its annual reports.
However, over the past two years, FASB has once again proposed requiring companies to expense stock options. Industry continues to oppose that requirement, for the same reason as we did before.
________________________________________________
Washington, DC:
Do you think that the tech industry will pursue it's fight against regulators to avoid expensing stock options, now that it's lost the clout of Microsoft?
Harris Miller: Yes. The public policy fight is an industry wide fight, not just revolving around one company. Microsoft has made it clear in its public statements announcing its new policy that the choice it has made for its own employees is not necessarily the right one for other companies and acknowledges the critical importance of stock options in its growth and success. For an organization such as ITAA, which represents companies both young and old, small and large, we have to focus on what is best for the entire industry. Smaller, startups, in particular, potentially derive great benefit from stock options, just as Microsoft did in its early years.
________________________________________________
Millbrae, CA:
What is the point of giving stock, rather than cash to an employee?
If the company gives stock, the employee can just turn around and sell the stock----in fact, this would be suggested by financial advisors to increase diversification and reduce risk.
If the company gives cash, the employee,
as he or she does today, can turn around
and buy stock?
If the company gives stock with a restriction on when to sell, isn't this really just another type of stock share which has its own value (i.e. if I can't sell in 100 years, the value is less than if I can sell for 1 year).
What is wrong with cash?
Harris Miller: No one is arguing that cash is not good. But the point of giving employees stock is to gave them an ownership role, too, to make sure that everyone has a stake in success going forward. Traditional business models often create a "we versus they" mentality, with owners and managers on one side, and employees on the other. But having be prominent shareholders also, it helps breakdown these barriers. Restricted stock--which usually means you do not really have full control until a certain amount of time has passed--is to encourage employees to take a longer term view both of a company's prospects and the individual employee's prospects.
________________________________________________
Washington, DC:
Hello-
I'm no accountant but I've always been confused why options haven't been accounted for as an expense. In order for investors to evaluate the financial standing of a company shouldn't stock options be accounted for under operating activities on the statement of cash flows rather than just a footnote? Right?
Harris Miller: I am not an accountant either. However, at the heart of the debate is the simple fact that there is no objective and straightforward method for evaluating the value of stock options. That is counter to clarity, which is what investors want. To use the extreme example, a company could issues millions of stock options, and when the stock is going up, the company would have to, under most methodologies, book a large expense. But then the stock could crash (either individually or because the entire market goes down), and suddenly the options are literally worthless, even though the company booked this huge expense.
We believe the current requirement that companies report their options in a footnote--which still gives companies the choice, which some have taken, to expense options--is the right way.
________________________________________________
Bethesda, Md.:
How are restricted stocks different than common shares available to the public? Or are they different?
Harris Miller: Restricted stock means that the company has awarded the stock to the employee with some restrictions, usually based on time of holding before the employee has the right to sell the stock. The stock itself is valued in the market the same as other common shares.
________________________________________________
San Mateo, Ca:
How can an investor determine the impact of this change by Microsoft?
Harris Miller: I am not a stock analyst and would not be comfortable making a specific comment regarding how this change in compensation practices impacts Microsoft as an investment. I know that various investment analysts have already issued statements and you can refer to those. As for the company itself, I believe management knows its employees well, and Microsoft management has indicated clearly that they believe this change will make its employees more satisfied with their compensation.
________________________________________________
San Bruno, CA:
Can you explain how the already granted options for Microsoft employees will be valued? Why is JP Morgan involved rather than simply letting the market determine their value?
How are options currently reported to the IRS?
Harris Miller: My understanding is that the plan is not final. However, the principle is that Microsoft will give employees a choice regarding their existing options: 1) they can hold onto them and, if they are currently "underwater" (that is, worthless because the current market price is below the price at which the option was granted), hope the price will rise above the option price and sell them then, or 2) create a private market, by which J.P. Morgan, an investment entity, can take the gamble instead and purchase the underwater options, paying whatever they feel is reasonable, and hoping the price will rise.
I do not know why Microsoft chose J.P. Morgan in particular, but there is no existing market for options, in many cases, especially options that are underwater. So Microsoft has partnered with J.P. Morgan to create an artificial marketplace.
The short answer to your third question is that individual options holders do not report them to the IRS until they exercise the options, which means when they sell them for a profit. If you want more information, you can visit the ITAA website, www.itaa.org, and go to the Tax page.
________________________________________________
Portland. OR:
Do you see other companies following in MS approach? ie Intel
Harris Miller: I am not aware of any specific companies currently planning to follow this approach, but I do know that many companies in the IT industry are reexaming their overall compensation schemes in light of various changes in the marketplace. For IT companies, their most valuable assets walk in to the office each morning and leave every night, so they are very sensitive to what it takes to recruit and retain top talent.
________________________________________________
Alexandria, Va.:
Should there be two sets of option rules -- one for small companies that encourages their use or at least doesn't penalize them for granting them; and one for large companies that makes them account for them as expenses and seeks to discourage their use?
Harris Miller: I would not support such a position. First, every small company I know wants to be a large company. Secondly, every company, large or small, should be able to decide what best motivates its employees. While IT companies often get the most visibility on the stock options issue, many non-IT companies, Burger King and WalMart among them, are also big users of stock options for employees because they feel this helps them, too, in recruitment and retention of their key people.
________________________________________________
washingtonpost.com:
Here's an article from today's Washington Post:
Area Firms Watching Trend on Stock Options
________________________________________________
washingtonpost.com:
Here's an article from today's Washington Post:
Area Firms Watching Trend on Stock Options
________________________________________________
washingtonpost.com:
Here's an article from today's Washington Post:
Area Firms Watching Trend on Stock Options
________________________________________________
Washington, D.C.:
How can the difficulty of valuing an option be an argument for not expensing them? There are several entries on financial statements that are estimates (examples: depreciation, appreciation, amortization, depletion)
Harris Miller: There is difficult, and there is impossible. For better or worse, over the years, schedules have been developed that are widely accepted on estimates such as depreciation of an asset. There is a value at a known time and place. For options, you do not know until the date of exercise--if that date ever comes--arrives. Let me give you one example of how the variability of options has reared its head. California and many other states had huge income tax windfalls in the late 1990's when stocks were going up because were cashing in options and paying substantial taxes on that income. But when the options stopped having value, the revenue for the states did not just drop a little, it fell off the table. So estimates by the states were not slightly off, they were off dramatically.
________________________________________________
washingtonpost.com:
Here's an article from today's Washington Post:
Area Firms Watching Trend on Stock Options
________________________________________________
San Bruno, CA:
Options do not align the interest of the employee with the shareholder since the option-holding employee has an incentive to take more risk (some would say "excessive" risk). How do you counter this argument?
Harris Miller: I do not agree with your premise that options granted do not align option holders interests with those of most other shareholders. A myth has been created that options are at the root of major corporate scandals. Yet the vast majority of corporations which grant options have been playing by the rules, so one cannot ascribe any cause and effect. If options really were at the root of the corporate scandal problem, the corporate scandal would be the norm, not the rare exception. Crooks are crooks, unfortunately, and they are found in private and public companies and in governments.
What is key to aligning employee and shareholder interests are basic elements of corporate governance, such as transparency, accountability, and clarity.
________________________________________________
DC:
You said, "Smaller, startups, in particular, potentially derive great benefit from stock options, just as Microsoft did in its early years." I read in The Washington Post today that the FASB is considering different rules for smaller startups. So wouldn't that help resolve that particular issue?
Harris Miller: I addressed a similar question earlier, arguing that I would not support special rules based on size of company, in part because every small company wants to become a large company.
________________________________________________
washingtonpost.com:
Here's an article from today's Washington Post:
Area Firms Watching Trend on Stock Options
________________________________________________
washingtonpost.com:
That wraps up today's show. Thank you everyone for joining us today.
________________________________________________
