Microsoft has become the first major software firm to turn its back on share options, the controversial form of reward that helped fuel the 1990s hi-tech boom.

In a sweeping scheme to overhaul pay policy for its 50,000 staff, the company said it would be moving towards directly granting employees packages of shares as a performance incentive.

Share options allow recipients to buy company stock at preferential prices at some future date, and therefore aim to tie compensation more closely to company performance.

During the 1990s, many firms, especially cash-poor but promising hi-tech and internet ventures, granted employees generous blocks of options - often in lieu of pay.

The appetite for these has faded as share prices have fallen, and many investors have become suspicious of the practice, since share option grants are not listed on a firm's balance sheet and are therefore effectively free.

Paying the price

It is this last point, the way options are accounted for, that has persuaded Microsoft to shift its policy.

Granting workers shares, rather than share options, is recorded on balance sheets, and therefore gives analysts a clearer view of the company's financial position.

The firm also argued that shares were a better incentive than options, since they are always worth something; options, by contrast, can quickly become worthless if the company's share price falls more than expected.

There has long been disagreement among companies and pay consultants over which form of compensation works best.

Almost all agree that tying pay to company performance in some way is crucial, but there are concerns that a focus on short-term share-price movements might detract from the long-term interests of the company.