Rich Karlgaard is the publisher of Forbes magazine. In this Wall Street Journal ($) column, Mr. Karlgaard examines what has gone wrong at Microsoft and what Bill Gates is doing to try and fix it:

Today Microsoft is struggling to figure out what attracts and motivates the most talented employees within capitalism’s free-agent system. The company had no such problem figuring that out in the 1980s and ’90s. Microsoft CEO Steve Ballmer liked to call the old motivational carrot “The Deal.” That arrangement worked like this: Come and work for Microsoft. Make do with a so-so salary but partake lavishly of options. Sure, you might be forced to grind away on 80-hour weeks for six or seven years. But you’ll change the world and get rich — wildly rich.
Microsoft’s stock has been flat since 1999. The Deal is broken. Not only that, but most of today’s change-the-world projects in computing live outside of Microsoft. These include open-source software, search engines, Web services, Flash video, WiFi, iPods, etc. For reasons of pay and excitement, Microsoft is losing its grip on a new generation of IQ.

Then, Mr. Karlgaard notes that the fortunes of companies in the technology world can changes just as fast as the technologies that they sell:

Digital Equipment Corporation reached its peak market value in 1988 but four years later sold to Compaq for a tenth the price. IBM was a titan throughout the 1980s yet nearly went bankrupt in 1992, before Lou Gerstner stepped in. At both IBM and DEC, the stellar 1980s financial results were lagging indicators of future vitality. The leading indicator was the flow of talent. By the late 1980s, even as DEC and IBM were at the peak of their financial powers, they already had lost the war for young IQ. The bright and bold were flocking to the new personal computer industry.
It’s hard to believe, but Microsoft, in 2004, has become a company run by gray hairs. Mr. Gates and Mr. Ballmer will turn 50 in the next 20 months. Older yet, with snowy white hair, is Jim Allchin, who directs the future of the company’s crown jewel, the Windows operating system . . .

In this context, Mr. Karlgaard suggests that the true purpose of Microsoft’s recent stock buyback program and dividend announcement is actually to reinvigorate “the Deal:”

My guess is that outside investors were not Microsoft’s primary audience for last week’s announcement of a one-time $32 billion dividend payment, a $30 billion stock buyback, and a doubling of the annual dividend payment. No, this move was done to rally employee shareholders and future employee shareholders. Microsoft needs a way to attract and keep future Bill Gateses and Steve Ballmers. It needs to revive The Deal.
A year ago, Microsoft announced it had removed the heart of The Deal — stock options — in favor of restricted grants. An army of Microsoftologists parsed the move for deeper meaning. One analysis had it that Microsoft was merely acknowledging what Mr. Gates’s good friend Mr. Buffett had asserted — that the early 2000s would produce lousy returns in the stock market. If that turned out to be true, stock options would only disappoint employees, lead to bad morale at Microsoft and make it harder to recruit.
In retrospect, maybe Microsoft should have been more optimistic about the stock market. It might have joined Intel, Cisco and others in the battle to keep stock options. But Microsoft didn’t do that, and since there are no longer options for employees, only share reward — paying a higher dividend — is available as an incentive for high-IQ employees.
It’s not The Deal, but it’s a start.