Microsoft's 1,200 Irish staff will begin receiving stock awards based on their performance from September, when the software firm introduces radical changes to its staff compensation plan.

The company said yesterday it would end its long-held practice of awarding stock options to its employees and instead start issuing direct stock grants that will be treated as an expense in its accounts.

Microsoft will also similarly treat its previous stock option scheme against earnings, and said it would restate past results in a move that will pressure other technology firms to follow suit.

In May, Microsoft said stock-based employee compensation under the "fair value method" would have cost Microsoft $656 million (€579 million) for its fiscal third quarter.

US regulators are investigating the possibility of forcing firms to treat stock options as expenses against their results.

The proposal is being resisted by technology firms such as Intel and Sun, which use options to help them to retain and motivate staff.

Microsoft chief executive Mr Steve Ballmer said the new compensation policy "would help the firm to continue to attract and retain the best employees, and better align their interests with those of our shareholders".

Under the scheme, employees will be granted stock awards over a period of years, in a similar fashion to options.

The awards will vest over a number of years, but crucially staff will not have to pay to receive shares.

Mr Matt Rossmeissl, head of Microsoft's European Operations Centre in Dublin, said Microsoft was seeking advice on the taxation implications of the scheme.

It is likely Microsoft's Irish employees would pay tax on their grants at the time that the stock wards vested, he added.

Microsoft also signalled it was developing a plan to enable staff already awarded "underwater options" - stock options priced at levels below Microsoft's current share price - to realise some value on these options.

Mr Rossmeissl said the firm was in discussions with investment bank JP Morgan about a plan that would enable staff to sell "underwater options" to the bank.

If the plan was approved, the scheme would be in force by the end of the calendar year, he said.

Meanwhile, a Microsoft spokeswoman confirmed the company employed 1,200 full-time staff in the Republic, considerably below the 1,700 staff level regularly reported by the firm.

A further 500 staff who work at Microsoft's Dublin site are employed by third-party vendors and therefore will not be eligible for the compensation plan.