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[Michael Czeiszperger <czei AT webperformanceinc.com>]

There was some facinating reporting recently on the proposed changed to the 
rules regarding stock options on NPR last week. I don't know how many of you 
have been following the issue, but some analysts have estimated that since MS 
uses options as a major part of their employee's pay, they've actually been 
loosing money in recent years. Its well known that MS pays under market value 
for programmers, and that making a bundle off of options is one of the major 
monetary draws to working there.

The stock option issue as I understand it is that corporations are allowed to 
not report any money spent on stock options as expenses when calculating 
profits or earnings per share for their annual report. This makes it very 
attractive for companies to pay employees as much as possible through stock 
options plans.

The downside to this is it obviously makes the company's earnings larger than 
it actually is, but don't worry, they won't pay any extra taxes on the larger 
earnings because the cost of a stock option plan can be deducted from your 
earnings reported to the IRS. Supposedly Enron, for example, reported 600 
million in stock options as an expense for 1999 and avoided paying taxes, 
while at the same time reporting that 600 million as extra income to wall street.

There is currently a bill pending in congress to change the stock option 
reporting plan, which now has a chance of passing in the wake of the Enron 
scandle. The new proposed rule change is companies can either deduct or not 
deduct the cost of a stock option plan, but that the reporting must be the 
same to the IRS and to the SEC. In other words, they are welcome to ignore the 
cost and report higher earnings, as long as they then pay taxes on those 
higher earnings.

This would have a huge impact on MS since a major portion of their expenses 
are in salaries, and major portion of their employee compensation is in stock 
options.If they started having to either report more earnings to the IRS and 
pay a lot more taxes, or to start recording their option expenses as an 
expense, this would greatly affect their bottom line and hence their stock price.

But don't take my word for it. Before, it was only a couple of outsider 
analysts at tiny firms that were complaining about it. Back in 2000, the nice 
folks at the Motley Fool are saying basically the same thing:

http://www.fool.com/portfolios/rulemaker/2000/rulemaker000217.htm

"So there you have it. $3.1 billion from a tax loophole, $1.3 billion from its 
employees, and $0.7 billion from put warrants combine to give Microsoft over 
$5 billion from its own stock in fiscal 1999. And it avoided paying $9 billion 
in wages. All that from a company that only had $7.8 billion in net income. 
And as long as the stock keeps going up, they can keep doing that ad infinitum."

The reason why this didn't affect the stock price is there was no way in hell 
the stock option rules were going to change. Now with the recent accounting 
scandals, the bill to change stock option rules has a good chance of passing.

It will be very interesting to see how this plays out.

--
Michael Czeiszperger
czei AT webperformanceinc.com