Simplify the Options
Microsoft's recent announcement that it will be discontinuing its stock option program for employees both surprised and delighted me. The basic idea of aligning employees interests with the interests of shareholders is a excellent one, but options plans have too many flaws.
First, options encourage short term share price thinking. If I'm an executive with options that expire in a few years, I want to get the price up as fast as I can even if it means pushing the boundaries of ethical business practice. This is clearly not in the best interests of long term shareholders who would rather have steady growth over time. Having a restricted block of stock, on the other hand, makes for a much closer alignment of interests.
Second, options are very difficult to value which makes them hard to expense. The cases of manipulation of stock options are many (for example, see Siebel's recent options debacle). A straight grant of stock is easy to expense and account for. The protests of Intel and Oracle that options are difficult to value so they shouldn't be counted as expense are complete garbage. To (mis-)quote Warren Buffet, "If options aren't compensation, what are they? If compensation isn't an expense, what is it?" Let's fix the problem of difficult valuation by eliminating the root of the complexity: options.
Third, restricted stock reduces risks to rank-and-file employees. If you replace options with stock, you get fewer shares, but the rewards curve is much flatter. If the price falls 20% on your stock, you still have 80% of you reward. If that same price fall takes the price below the option strike price, you get nothing. That discontinuity can be pretty devastating if you were counting on the money for your financial goals. In general, most people don't need to have the highly amplified risk/reward ratio offered by options and would be better off in the long run with stock.
So, as an investor and a technology worker, I'm really glad to see Microsoft move from options to restricted grants. Maybe other companies will follow, but I'm not holding my breath.