Will fewer risk takers apply?

As Microsoft Corp. and other companies retreat from stock options, they may find it harder to attract entrepreneurial staffers vitally needed to spur innovation, recruiters and pay consultants believe.

The software company announced plans to stop issuing options and instead award restricted shares to its 50,000 employees. Microsoft joins companies such as Progressive Corp., Altria Group Inc., Dell Computer Corp., Amazon.com Inc. and Cendant Corp., which recently reduced or eliminated their use of the popular pay tool. Recently, DaimlerChrysler AG confirmed that it is exploring alternatives to options as a way of compensating executives.

Options allow employees the right to buy stock at a fixed price during a specified period -- and they can reap big windfalls if the price goes up sharply. By contrast, restricted stock shares are actual shares that can be sold only after they are vested, typically between three and five years after they are issued.

Microsoft management initially worried the shift might hurt employee retention and recruitment, says Ira Kay, an outside adviser. During focus groups to discuss the proposed change, rank-and-file workers also questioned whether abandoning options would hurt the company's entrepreneurial culture, according to Mr. Kay. "How are we going to have that culture in the future?" some staffers asked.

Mr. Kay, head of the compensation-consulting practice for Watson Wyatt Worldwide, says he cautioned management that Microsoft may no longer "attract the kind of people who took them where they are." Executives decided that it was more important "to make sure they've locked in the people they want to keep," he adds.

Microsoft employees are unhappy because after three years of stock-market declines, many of their options are close to worthless.

Based on the internal feedback, Microsoft tweaked the new restricted-stock program to make sure it wouldn't hurt the entrepreneurial culture. The plan now "appeals to the kind of talent we want, entrepreneurial and otherwise,'' says Ken DiPietro, Microsoft's vice president of human resources. For example, he notes, a midlevel technical developer mulling an offer elsewhere accepted a position with Microsoft after hearing about its new pay plan Tuesday.

The developer was among four prospects to whom Microsoft initially had offered stock options. "They had not accepted and were vacillating,'' says Mark Murray, a Microsoft spokesman. "We went back to them with the new [restricted] stock plan and they accepted on the spot.''

Microsoft hasn't had difficulty attracting applicants. Indeed, it often gets 1,000 resumes a day. Moreover, in this depressed downturn, it is a buyer's market for technology staff.

Microsoft "will be able to get lots of people" in the current job market, says Alan Johnson, managing director of Johnson & Associates, New York-based pay consultants. But with an economic recovery looming, employers cutting options "will have trouble getting the super 10%" of the talent pool, he predicts. "People who don't want to work at a company in maintenance mode will stay away."

Some high-tech veterans already feel that way. "A guy like me will always take an opportunity that has the greatest upside," says a 47-year-old executive who has worked for four California technology companies. "I'm very confident in my own abilities." He thinks he has a greater chance of getting rich from options than from salary plus restricted shares.

Numerous businesses that have trimmed or eliminated their option usage are hiring new staffers. None say they fear the shift will damage the caliber of their applicants.

Dell Computer, for example, intends to grant about half as many stock options this fiscal year as the 84 million given during the year ended Jan. 31. A majority of the Round Rock, Texas, company's 40,000 staffers world-wide are eligible for options. Its current employment level is up from 34,800 in May 2002.

"Our compensation package reflects what's necessary to hire and retain people in the marketplace," says Dell spokesman Mike Maher. "It's a different time than it was three years ago" when the talent market was red-hot and the stock market was booming. Equally important, he notes, options alone don't attract innovative, entrepreneurial individuals to a good company. Dell doesn't have any plans to offer restricted stock to employees.

It's a similar story at Amazon. The Seattle Internet retailer switched to restricted stock from options last year. Amazon gives employees fewer restricted shares than it used to offer options.

"We find we can still get great people and our attrition rate is below the industry average," says Bill Curry, an Amazon spokesman. "We hire people on a lot of different metrics. Entrepreneurship is [just] one."

Indeed, certain recent hires at employers halting options say the company's performance influenced them more than its altered pay practice.

Dave Williams, 37, is a product manager in Richmond, Va., for Progressive, a Mayfield Village, Ohio, auto insurer. In April, it began giving 615 executives and managers restricted shares instead of options. None of their options were worthless at that time.

Mr. Williams knew about the imminent change before joining the company in late March. He realized he would never get rich from an equity award unless his employer enjoyed a solid track record, management team and strategic plan. He says he took the job because "Progressive has that in spades."