By Helen Jung
The Associated Press

SEATTLE - Microsoft Corp., the granddaddy of stock option compensation, will abandon the practice and instead give shares outright to all employees.

The software giant also said Tuesday it would expense the cost on its books, potentially knocking down profits by billions of dollars.

The change in stock compensation means employees will automatically receive actual shares of Microsoft stock over time instead of options - the right to purchase stock at a set price.

Typically, outright stock awards, known as restricted stock, have been reserved for top executives' compensation. Microsoft said the new policy would be in effect in September for its 50,000 employees.

For options to be valuable, the stock must trade above the "exercise price."

Restricted stock is essentially free money, regardless of the stock's performance.

With the stock markets struggling to claw out of a three-year bear market, stock prices are considerably lower than in the late 1990s and 2000 - when these options were granted - and many employees' options are now worthless.

Microsoft said it is also working on a plan that allows employees to sell these "underwater" options to a third-party financial institution.

Microsoft chief executive Steve Ballmer said the change will help Microsoft retain and attract high-quality employees.

Analysts said other companies might follow suit, but Ballmer said Microsoft wasn't trying to make "some grand statement."

"Our compensation philosophy is simple," he said.

"We want to be a magnet for the best people by paying smarter. We want to attract and retain employees by offering real ownership and great long-term financial incentives."

Microsoft announced the change after the close of markets. Its shares fell 22 cents in after-hours trading, after finishing the regular session up 28 cents at $27.70 on the Nasdaq Stock Market.