Microsoft Underwater Options Sale Generates $382M

December 12, 2003 ( - About half of the Microsoft Corporation employees eligible to sell their largely worthless underwater stock options took advantage of the plan and generated $382 million in proceeds that will be awarded back to the workers.

In a US Securities and Exchange Commission (SEC) regulatory filing, the software giant revealed that 51% of eligible employees – or 18,500 workers – took part in the program, with 344.6 million of the 621.4 million eligible options being tendered, according to news reports.

Participating employees will receive their first payment, totaling $218 million, by the end of this month. Microsoft will shell out the rest in December 2005 and December 2006. Staggering the payments is designed to increase workforce retention, as employees need to remain with Microsoft to receive the payout, the company said.

The value employees received for the shares was based on a complex set of formulas that varied based on the exercise price of the options and when the options were set to expire. The formulas also involved taking the average selling price of Microsoft shares between November 14 and December 8, during which time the shares had an average value of $25.57.

Microsoft devised a program by which workers could sell their options to J.P. Morgan Chase. J.P. Morgan is paying Microsoft $382 million, which is then going to the workers. J.P. Morgan, which now has the rights to the options, also received $17 million in fees from Microsoft for handling the transaction.

This options program represents the culmination of program Microsoft announced in July, as part of a series of changes it made in the way it compensates its workers. At that time, the company said it would switch from its practice of awarding stock options to employees and instead would start granting actual shares of restricted stock (See Microsoft Wants to Give Workers a Real Stock “Option” ).

Over the years, the Redmond, Washington-based Microsoft used options to lure many employees, and many employees became millionaires by cashing them in during the tech boom of the late 1990s. But lately Microsoft’s stock price has flagged, making the options less enticing, and the company is switching from offering options to offering stock grants. For example, under the current program, thousands of Microsoft employees had options to buy stock at $33 or higher, but the stock has been trading in the mid-$20s, making those options essentially worthless, or “underwater.”

For overseas employees, the option program rules vary by country, with workers in a few countries not eligible for the program because of local issues. The payment schedule also differs in some nations including Australia, Canada, Germany, Hungary, India, Japan, the Netherlands, Poland, Singapore, Spain and Venezuela. Microsoft said it may still implement similar programs in one or more of the countries where employees were not able to take part in the original program.