No More Retiring At 30

The first time I realized that stock options were more than just a nice perk--that they had created a culture of their own, different in unexpected ways from the one in which most of us live--came about a year after I went to work for Microsoft in the mid-1990s. One of the software jockeys I worked with announced he was going to "retire." He had joined the company straight out of college and had been there seven or eight years. He was 30 years old. Why retire? He explained, "Well, as you know, I just got married, and we want to start having kids. So it seems like a good time for both of us to stop working."

I assumed that this young fellow was rich, though I had, and still have, no clear idea how rich. What hadn't occurred to me is how becoming rich, more or less unexpectedly, at the beginning of your adult life must make the world look different. Different than it looks to normal people who have to worry about money all their lives. Different than it looks to the conventionally rich, who get that way over the course of many years. Different, even, than it looks to those who inherit wealth and therefore grow up knowing it's coming. Of course! You get married, then you retire, then you have kids. That's life. In the stock-option culture, it makes perfect sense.

At Microsoft, until last week, almost every employee got stock options, in varying amounts, every year. Whether they made you rich depended on how early you got there, how long you stayed and how smart or lucky you were about when you cashed them in. (I was moderately late, and moderately stupid.) One of the charms of the stock-option culture is that it scrambles the usual linear relationship between status and wealth. Secretaries, if they got there in the 1980s, own big boats and second homes. Senior managers who came later have smaller bank accounts than some of their subordinates.

Microsoft announced last week that it would stop handing out stock options and start giving employees shares of stock instead. Other tech companies are expected to do likewise. What's the difference? An option is the right to buy a share at a certain price--usually the market price at the time the option is issued. So an option is valuable only if the stock goes up. For most of Microsoft's history, that has not been a problem. In recent years, it has been a problem. Most recent options are "under water." They give you the unappealing right to buy the company's stock for more than it's currently selling for.

Actual shares of stock are worth something even if the price goes down. But shares don't increase in value as fast as options when the price is rising. (If a stock goes from $50 to $60, it has increased in value by $10, or 20% before taxes. If you have an option to buy a share of that same stock at $40, when the stock goes from $50 to $60, the value of the option increases from $10 to $20, or 100% before taxes.) And shares cost more for the company to issue, so companies won't hand out as many. In essence, employees will be giving up a risky bet on a lot of money in exchange for a safer bet on somewhat less money. It is an appropriate trade-off for a more sober financial age.