Rising costs, slower sales growth make Microsoft benefits a little less stellar

By Dina Bass
Bloomberg News

Microsoft Corp., the world's largest software company, will cut vacation time for new employees and charge U.S. workers a $40 co-payment for some prescription drugs as part of plans to cut costs as sales growth declines.

Microsoft also will reduce the discount for employee stock purchases to 10 percent from 15 percent starting in July, spokeswoman Tami Begasse said.

The drug co-payment will apply if a generic is available and the employee chooses the name brand. Using generic drugs can save Microsoft as much as 80 percent in prescription costs, she said.

Chief Financial Officer John Connors wants to reduce operating expenses by 21 percent next year to about $21.9 billion to boost profit as sales slow. Microsoft has forecast revenue to grow as little as 3.4 percent in the next fiscal year, compared with the 14 percent it expects for the year ending next month.

"There is a drive toward cost-cutting across the whole company, and this is part of that," said Matt Rosoff, an analyst at the Kirkland, Wash.-based market research firm Directions on Microsoft.

Begasse declined to provide a figure for how much Microsoft expects to save overall from the changes.

U.S. employees hired starting next year will receive two weeks of vacation for their first two years at the company, down from three weeks, Begasse said. The changes are part of a regular review of benefits, she said.

The company has been considered to have "an excellent benefits package," Rosoff said.

Microsoft provides health-care and prescription drug coverage. It also offers one month paid and two months' unpaid infant care leave and pays for workers' gym memberships. It will also pay for most of a weight-loss program for employees who qualify.

Shares of Microsoft fell 21 cents to $25.62 at 4:03 p.m. New York time in Nasdaq Stock Market composite trading. They have fallen 6.4 percent this year.

The company is also trying to save on travel by cutting 20 percent of all business trips, and will try to save on computers and software used by workers.

Microsoft is facing slower sales next year because its new version of Windows has been delayed, most customers aren't renewing two-year licenses giving them the rights to product upgrades and the company doesn't expect as large a benefit from currency conversions as it had this year.

Expenses have risen, trimming Microsoft's operating margin to 41 percent in fiscal 2003 from 50 percent five years ago. In addition, Microsoft's workforce has nearly doubled to more than 56,000 since 2000, increasing benefit costs.

Connors said in March the company has to "hunker down" before the release of its next Windows, called Longhorn, which Microsoft hopes to have on sale in the first half of 2006.

"When we think about the next couple of years, into the pre-Longhorn phase, we've got to do a really good job in terms of how we get revenue growth and how we get profit growth with less increase in resources," he said.

Employees learned of the changes yesterday in an e-mail from Human Resources Vice President Ken DiPietro.

"I don't think it will affect their ability to recruit," Rosoff said. "It might cause some grumbling from people who are already there, but it's par for the course at many firms."