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Redfaced in Redmond? Hardly.
Microsoft has risen to the Bush-tax-cut occasion.


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Donald L. Luskin

The decision this week by Microsoft to no longer award stock options to employees — and instead, to award stock itself — is a savvy move by a savvy company that will optimize it for a new world of lower taxes on dividends. But the business media has missed this epochal story.

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Instead, reporters and commentators are using the Microsoft options story to do what they always do — perpetuate the myth that wealth creation is tantamount to the sin of greed.

No one in Redmond, Washington, they say, deserved to get rich in the first place, and now none of them ever will again. They say that the mighty have fallen — and isn’t it fun to watch!

That Microsoft’s decision might be good for employees and good for shareholders — and that it was triggered by the dividend tax cuts championed by President Bush and universally reviled in business reporting — just doesn’t fit in with the liberal media’s agenda.

Immediately following Microsoft’s announcement on Tuesday, the media started grave-dancing. They all did it — even the Wall Street Journal, America’s premiere business newspaper.

A Wednesday Journal front-pager by Robert Guth and Joanne Lublin declared that

The golden age of stock options is over … The company’s decision comes amid mounting pressures on stock options, long a pay perk for senior executives. More recently companies began doling them out to rank-and-file employees, making them an iconic trapping of wealth during the boom of the 1990s.

This is objective business reporting? How do these reporters know, on the basis of a single company’s actions just hours before they filed their story, that the “age” of anything is “over”?

Since when are options — a fundamental component of compensation for the time and talent of hardworking executives — a mere “pay perk”? If that’s all they are, then Peter R. Kann, the CEO of the Journal’s parent Dow Jones & Co., who participates in an options program just for executives, should give them up. The story neglected to mention that Microsoft chair Bill Gates and CEO Steve Ballmer have never received options.

Why does compensating rank-and-file employees with options — the same way as executives — constitute “doling them out”? Perhaps Guth and Lublin don’t feel the quality of their work entitles them to anything more than their pay-grade, and would see options granted to them as mere charity. I doubt workers at Microsoft feel that way.

And how is it that options are dismissed as an “iconic trapping of wealth,” rather than celebrated as the mechanism that made the creation of wealth possible for millions of workers? But that only applies to workers who had the talent and the gumption to work for companies like Microsoft. Is it possible that people like Guth and Lublin are just a teensy bit envious?

But the best line of all comes from a Wednesday column in the Journal by Jessie Eisenger. He crowed, “Microsoft, once the bullying monopolist, is trying to become a good corporate citizen.”

Why does it make a company a “good corporate citizen” to not grant stock options? Well, since Dow Jones & Co. grants them (although the column did not disclose this), I guess Mother Dow is a “bad corporate citizen.”

Britain’s premier business newspaper, the Financial Times, did no better. According to its “Leader” column Wednesday,

The fat lady has sung. … The software group has recognised that the technology boom is over and decided to behave like normal businesses that do not expect exceptional growth. It is an example other mature technology companies should follow.

They’re all wrong. It’s not about technology booms or golden ages being over. Stock grants give employees almost all the upside they had with options — and some downside coverage to boot, since the stock will always be worth at least something while options can become entirely worthless. That downside coverage is why the media is calling the abandonment of options a bear-market strategy for Microsoft. Yet that contradicts the nonsensical anti-options argument of Warren Buffett that the media has been uncritically repeating ad nauseum: that options incentivize employees to ignore downside risks.

And it’s not about being a good citizen or a bad citizen. It’s about taxes. It’s about the fact that President Bush has removed most of the tax barrier to profitable companies paying out more of their earnings in the form of dividends. Or in the special case of some giant technology companies, it’s about paying out a vast cash hoard — for Microsoft, that hoard is $46 billion. Unlocking all that tax-captive wealth is one of the key reasons why the Bush administration fought so hard to end the unfair double taxation of dividends.

But options stand in the way. Why? Because when a company pays a dividend, its stock price drops by the amount of the dividend. And when a stock drops, its options become less valuable. But what happens when employees own stock instead of options? As CEO Ballmer put it in an interview in the Journal on Wednesday, “when we give you one of these shares and it vests, you’re a shareholder. Like other shareholders you get dividends.”

So, over time, the replacement of options with stock at Microsoft will clear the way for the tax-optimal payout of 28 years of accumulated and locked-up wealth — one of the greatest and most rapidly accumulated corporate treasure-troves ever. That Microsoft would undertake to do this suggests that they have confidence in the durability of the Bush administration’s tax policies — they’re not as concerned as the media told them they should be about the allegedly “gimmicky” sunset provision in the 15 percent maximum tax rate on dividends.

That same kind of confidence is beginning to pervade the business community, as Larry Kudlow pointed out when he celebrated the resurgence of corporate takeover activity. This move by Microsoft is further proof that the Bush administration’s economic vision is working.

Can the media just not see that? Or are they afraid that you will see it?



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