Stock based compensation: The case of the Microsoft Millionaires

During most of the 80s and 90s, stock options were the preferred long-term incentives tool  for most US companies. Accounting rules allowed the award of stock options without booking any expense at the time of delivery. For startups in a time of economic growth, this practice was ideal for their interests.

In addition, employee benefits were substantial. The upward trend of the stock market during most of the 90s led to a large accumulation of wealth by the option holders. Since Microsoft went public in 1986, it is estimated that between 90% and 95% of employees received options. During this period, the share price soared and Microsoft employees accumulated great fortunes  in the value of their options. They were called the "Microsoft millionaires".

However, in 2000, when the speculative bubble ended, Microsoft shares declined from $60 to almost $20. In 2001, at a price of $25 per share, around 70% of Microsoft options had no value. Most of its 50,000 employees had been recruited during the past five years and had not participated in the profits from the previous decade.

In this new context, Microsoft and many other companies changed their compensation strategy and replaced stock options with more predictable remuneration tools such as pension plans, delivery of shares and higher fixed salaries.

- Published in the quarterly magazine of the Law, Economics and Business Faculties of ICADE, No. 61, January-April 2004 on the article by Richard N. Ericson in Workspan, WorldatWork. September 2003, Volume 46, Number 9: The Microsoft Ripple Effect: Is It Your Time for an Overhaul Equity?