In a move that Microsoft Corp. says will help it continue to attract and retain key staff, the Redmond, Wash., software maker on Tuesday restructured the way it compensates employees, saying that starting in September it will give staff actual shares in the company rather than stock options as is currently the case.
The new Stock Award program will allow staff to earn actual shares of Microsoft stock over time, rather than being awarded options that give them the right to purchase stock at a set price.
In addition, a large portion of stock-based compensation for more than 600 of Microsofts senior leaders will now depend on growth in the number and satisfaction of Microsoft customers, CEO Steve Ballmer said.
Ballmer said these move will help the company attract and retain “the best employees, and better align their interests with those of our shareholders. These changes are a key step in our ongoing effort to position Microsoft for long-term success.”
Ballmer and Microsoft Chairman and Chief Software Architect Bill Gates will not receive Stock Awards, just as they have never received stock options.
Microsoft is also working on a plan that will let its staff realize some value on the portion of their stock options that are currently “underwater,” by selling their options to a third-party financial institution. If approved, this plan should be implemented by the end of this year.
“We want to be a magnet for the best people by paying smarter. We want to attract and retain employees by offering real ownership and great long-term financial incentives. And we want to ensure that our senior employees total compensation is even more closely linked to growth in the number and satisfaction of our customers,” Ballmer said in a statement.
The new compensation plan is the result of more than a year of review by Microsofts senior executive team and human resources staff, and reflects feedback from employees. As a result of these changes, Microsoft will begin expensing all equity-based compensation, including previously granted stock options from its 2004 fiscal year.
“Because Stock Awards must be expensed as they vest, we will include the cost of all equity-based compensation in both future and prior years financial statements to preserve year-over-year comparability,” said John Connors, Microsofts chief financial officer.
Microsoft has also recently sharpened the focus of its nearly $5 billion investment in R&D innovation around an integrated platform strategy and the forthcoming “Longhorn” wave of products.
It is also ratcheting up the pressure on its staff to improve connections with customers, increase internal efficiency and meet competitive challenges, especially those surrounding Linux, head-on.
Microsoft executives are increasingly focusing on the Linux threat. In May, the German city of Munich decided to dump Windows and move to Linux and other open-source software, despite the intervention of Ballmer, who interrupted his ski vacation in Switzerland to personally call on Munichs mayor.
In a teleconference with the media and analysts in April to present Microsofts third-quarter financial results, John Connors, Microsofts chief financial officer, said that Linux and non-commercial software were one of the risks facing the company.
That followed the February admission by Gates to more than 600 of Microsofts Most Valuable Professionals (MVPs) that he is taking the Linux threat seriously.
In its last 10-Q quarterly filing, Microsoft also said that the popularization of the open-source movement continues to pose a significant challenge to its business model.
The latest compensation moves also follow a number of end-of-financial-year staff shuffles. Earlier this month Peter Houston, who as the senior director of Microsofts Windows Server Strategies has had to defend and explain the companys response to the competitive threat posed by Linux and open source for the past 18 months, moved to Microsofts Enterprise Management Division, where he will work on the upcoming Systems Center product.
That followed last months reorganization of Microsofts platforms group, where the Developer and Platform Evangelism Business, the Windows Server System Business, and the Enterprise Storage and Management Business were combined under the existing Servers and Tools Profit & Loss center (P&L), headed by Senior Vice President Eric Rudder.