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Thursday, May 20, 2004 - Page updated at 01:42 A.M.
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Northwest stock contest 2004 | Consumer affairs

Microsoft cuts some perks with an eye on bottom line

By Kim Peterson
Seattle Times technology reporter

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Microsoft has lured many a tech worker to its ranks by offering perks that few other companies could match, but the company said this week it would scale back some of those employee benefits in a cost-cutting move.

Coming less than a year after the company yanked its stock-option plan, the changes appear to be bringing Microsoft's vaunted worker benefits more in line with those of other companies.

The company announced to workers Tuesday that it was cutting prescription-drug benefits, tightening parental-leave policies and making it more expensive for them to buy stock. It also will decrease the vacation time given to future employees.

The cuts are expected to save the company at least $80 million a year, and come as part of an across-the-board effort to reduce costs. Microsoft has promised investors it will limit new spending in the coming year.

In an e-mail sent to employees Tuesday, Ken DiPietro, vice president of human resources, said the changes were the result of a regular review to ensure that benefit programs "balance the interests of our employees and the expectations of shareholders."

The announcement is the latest sign of a new fiscal reality for Microsoft employees. Microsoft in years past was a gold standard in the tech world when it came to rewarding its workers. Its stock options made early employees into millionaires, and that newfound wealth invigorated the Puget Sound-area economy.

The stock options are gone — since September, Microsoft has given employees outright stock, but in smaller amounts. Also gone for many of the rank and file is the dream of becoming an instant millionaire, especially with the company's share price stagnating over the past year.

Microsoft has imposed cost-cutting measures throughout the company in recent years as part of its effort to sustain profit growth amid a weaker technology market. The company earlier told workers to reduce travel and entertainment spending and look for other ways to trim budgets. Some said the benefit cuts are a more direct hit.

"It's a blow to the self-esteem and the work ethic of the average employee," said a nearly five-year employee, who did not want to be named. "I didn't find anyone here who was thinking, 'Wow, this is a great move and this will get the stock up.' "

The company still offers some benefits unheard of in much of the corporate world. Some employees get free gym memberships, and all get free beverages at work, well-stocked cafeterias and flexible time off.

Cecily Hall, Microsoft's director of benefits in the United States, said she didn't think the changes would affect morale or recruitment.
 
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"Microsoft has an incredibly generous benefits package," she said. "Employees recognize that, and I think that these changes offer a lot of choice and flexibility and therefore should not impact overall morale."

Of the benefits cuts announced this week, workers seemed most concerned about changes to the plan that allows employees to purchase discounted shares of company stock.

Previously, employees could buy shares at a 15 percent discount off the market price. Their purchase price was based on the share price at either the beginning or the end of a designated time frame — a feature known as "look back."

For example, if the stock price was $20 at the beginning of the period but $25 at the end, they would be able to apply the discount to the $20 price, and get a better deal.

Starting July 1, employees will get a 10 percent discount and it will be based only on the closing share price on the last day of each quarter.

The company said the new program is more flexible because it allows workers to buy shares four times a year instead of twice a year. But some financial experts said removing the "look back" feature takes away much of the potential gain for workers.

"I've never seen a plan that doesn't include that," said Rich Chambers, a financial planner in the Bay Area who specializes in stock-option and stock-purchase programs. "This is unusual in that it eliminates the possibility of a huge, free money portion of the deal."

Chambers said that most tech companies with stock-purchase plans offer workers a 15 percent discount compared with Microsoft's 10 percent. But Microsoft lets employees contribute up to 15 percent of their pay to the plan, while other companies generally cap that at 10 percent.

Even under the new structure, Microsoft's plan is a good deal for workers, said Chambers and other financial planners. If the employees buy the shares and sell them right away, they are pretty much guaranteed some profit.

Microsoft estimates it will save $60 million a year with the stock-program changes. The company saves because workers will buy less stock, Chambers said. Microsoft will have fewer shares to subsidize, the pool of shares will be less diluted and its share price could improve as a result.

Gregg Quinn, a Bellevue financial planner who works with Microsoft employees, said his clients don't seem too concerned with the changes.

"Microsoft employees have just had such great benefits for so many years," he said. "You scale those great benefits back, and they're still better benefits than what other places offer."

The company also told employees it will not pay full price for brand-name prescription drugs if generic versions are also available. Over the past two years, Microsoft's prescription-drug expenses have increased and now eat up 16 percent of the company's overall benefit budget, DiPietro's memo said.

The company used to cover the full cost of brand-name drugs for employees. Next year they'll have a $40 copayment on a brand-name drug if a generic alternative exists.

Microsoft estimates that change will save about $20 million a year.

Also next year, employees must take their four weeks of paid parental leave within six months of having or adopting a child. Previously, employees were able to take their leave within a year.

Finally, new employees hired after Jan. 1, 2005, will accrue two weeks of vacation a year for the first two years instead of three weeks a year. After the two years, they'll get three weeks a year.

The changes fired up a Seattle labor group that focuses on high-tech workers. Marcus Courtney, president of the Washington Alliance of Technology Workers, said his group will talk more to Microsoft employees about forming a union.

"There's a whole culture shift that's taking place there," he said. "It's increasingly about focusing on hurting the employee's bottom line to help Microsoft's bottom line."

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Copyright © 2004 The Seattle Times Company

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