1998 Stock Option Gain And Bonus Deferral Program

Exhibit 10.7

1998 MICROSOFT CORPORATION

STOCK OPTION GAIN AND BONUS DEFERRAL PROGRAM


1. Purpose.


The purpose of this 1998 Microsoft Corporation Stock Option Gain and Bonus Deferral Program is to further the long-term growth of Microsoft Corporation by allowing selected Microsoft Corporation executives to defer the payment of cash bonuses and the issuance of stock equal to the gain realized upon the exercise of stock options in order to keep their financial interests aligned with Microsoft and provide them with a long-term incentive to continue employment with Microsoft.


2. Effective Date.

This Program is established effective November 18, 1998.


3. Definitions.

3.1 Account or Accounts means the account(s) established for a Participant pursuant to Section 8, consisting of a Deferred Bonus Account and/or a Deferred Stock Option Gain Account. Accounts shall be maintained solely as bookkeeping entries by the Company to evidence unfunded, unsecured obligations of the Company.


3.2 Board means the Board of Directors of Microsoft Corporation.

3.3 Bonus means the amount payable by the Company to an Eligible Executive as an individual performance bonus, executive bonus or any other bonus/incentive award that is approved by the Program Administrator for deferral under the Program.


3.4 Claimant means a Participant (or in the case of the Participant's death, the personal representative of his estate) who makes a written application to the Program


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Administrator for benefits that he believes are due under the Program. For purposes of determining the proper death beneficiary under this Program, this Program shall not be interpreted as preempting applicable state law regarding the ownership rights of Accounts upon the Participant's death. For example, although this Program states that upon a Participant's death, Account balances will be paid to his estate, the personal representative will be obligated to pay any benefits owed to a spouse or otherwise as a result of any applicable community property laws.


3.5 Code means the Internal Revenue Code of 1986, as amended.

3.6 Company means Microsoft Corporation.

3.7 Deferral Election means an election to defer (i) issuance of the shares of Stock equal to the Stock Option Gain realized upon the exercise of an Option or (ii) receipt of part or all of a Bonus.

3.8 Deferral Period means with respect to a specific deferral of a Bonus or Stock Option Gain, the period of five (5), seven (7), or ten (10) years from the date on which the corresponding Bonus would otherwise have been paid or the date the Option was scheduled to expire had it not been exercised; provided that in the event of the Participant's Termination of Employment the Deferral Period shall end on the date of Termination of Employment.


3.9 Deferred Bonus Account means a bookkeeping account established pursuant to Section 8.1 for Bonuses that are subject to a Participant's Deferral Election.


3.10 Deferred Stock Option Gain Account means a bookkeeping account established pursuant to Section 8.2 for Stock Option Gains deferred under this Program.


3.11 Disability means any long-term disability as defined under the Company's long-term disability plan. The Program Administrator, in its complete and sole discretion, shall


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determine a Participant's Disability. The Program Administrator may require that the Participant submit to an examination on an annual basis, at the expense of the Company, by a competent physician or medical clinic selected by the Program Administrator to assist in the determination of Disability. On the basis of such medical evidence, the determination of the Program Administrator as to whether or not a condition of Disability exists or continues shall be conclusive.


3.12 Election Form means the form specified by the Program Administrator on which a Participant makes a Deferral Election.


3.13 Eligible Executive means a full-time employee of the Company who is (i) an elected officer of the Company, (ii) at the level of Vice President or above, (iii) at Level 80 or above on the Company's salary range, and (iv) working within the United States of America. In addition, the Compensation Committee of the Board may, in its discretion, extend coverage to persons who are selected by the Committee and who either (x) meet all of the foregoing requirements except that they are working outside of the United States of America, (y) meet all of the foregoing requirements except that they are full-time employees of a subsidiary of the Company, or (z) are officers of a subsidiary of the Company.

3.14 ERISA means the Employee Retirement Income Security Act of 1974, as amended.


3.15 Exercise means an election to exercise an Option.


3.16 Mature Shares means shares of the Company's Stock delivered by a Participant in payment of the Exercise price of an Option; provided that Mature Shares shall not include any shares of the Company's Stock that may be received upon exercise of such Option, nor Stock that the Participant purchased pursuant to a prior stock option exercise which occurred less than six months prior to the exercise of such Option.


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3.17 Fair Market Value of the Stock as of a particular date means the closing price of the Stock as reported on NASDAQ on such date.


3.18 Option shall mean one or more non-qualified stock options, issued to a Participant under any stock option plan of the Company, with respect to which the Participant has elected to defer the Stock Option Gain. Option shall not include any rights under the Company's Employee Stock Purchase Plan


3.19 Participant means an Eligible Executive who has elected to participate in the Program and has made a Deferral Election.

3.20 Program means this 1998 Microsoft Corporation Stock Option Gain and Bonus Deferral Program, as amended from time to time.

3.21 Program Administrator means the Compensation Committee of the Board, or its delegate or delegates appointed to administer the Program.


3.22 Program Year means the 12-month period from January 1 to December 31, provided that the initial Program Year shall be a short Program Year that begins on the Effective Date and ends on December 31, 1998.


3.23 Stock means Microsoft Corporation common stock.


3.24 Stock Option Gain means the number of shares underlying an Option minus the number of Mature Shares required to pay the Exercise price for those shares. For example, if a Participant elects to defer the gain on 100 shares and is required to deliver 10 shares of Stock as payment for the Exercise price on the 100 shares, the Stock Option Gain will be 90 shares.


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3.25 Termination of Employment means the termination of the Participant's employment relationship with the Company for any reason including, without limitation, involuntary termination with or without cause, voluntary termination, disability, death, or retirement.


4. Participation.

Each Eligible Executive becomes an active Participant on the date he first submits an Election Form pursuant to Section 5 or 6. An individual's eligibility to make additional deferrals under Section 5 or 6 shall cease upon the date he ceases to be an Eligible Executive. In the event an Eligible Executive ceases to be an Eligible Executive (but does not incur a Termination of Employment) between the date a Deferral Election is made and the date (i) a Bonus is scheduled to be paid (absent the deferral) or (ii) an Option is exercised, the Bonus will be deferred and the Option will be exercisable and the gain deferred pursuant to the Participant's prior Deferral Election. An individual who has been an active Participant under the Program will cease to be a Participant on the date his Accounts are fully paid out.


5. Bonus Deferral Election.


5.1 Manner. Each Eligible Executive may make an election to defer under the Program any percentage (in 10% increments up to 100%) of his Bonus by submitting a valid Election Form to the Program Administrator. To be effective, an Eligible Executive's Election Form for a Bonus deferral must set forth the percentage of his Bonus to be deferred (in 10% increments), the investment choice under Section 8.1 (in 1% increments ), the Deferral Period, and any other information that may be requested by the Program Administrator from time to time. A Participant is not required to defer all Bonuses expected to be paid in any given year.


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5.2 Timing. Subject to the next two sentences, an Eligible Executive must make a Deferral Election with respect to his Bonus in the calendar year prior, and at least six (6) months prior, to the date on which the Bonus would otherwise be paid. A new hire who is an Eligible Executive may make a Deferral Election with respect to his Bonus to be paid during the current calendar year so long as the Deferral Election is made either before his date of hire or within thirty (30) days after his date of hire, and is made before the Bonus is earned. The Program Administrator may establish limited Deferral Election periods during which Eligible Executives must make Deferral Elections.


6. Stock Deferral Election .


6.1 Manner. Each Eligible Executive may make an election to defer under the Program the Stock Option Gain on 100% of the shares underlying an Option or on a portion of the shares underlying the Option (in 10,000 share increments) that would otherwise be recognized upon exercise of an Option, by submitting a valid Election Form to the Program Administrator. To be effective, an Eligible Executive's Election Form for a deferral of a Stock Option Gain must set forth the specific Option and number of shares on which the gain will be deferred the Deferral Period, and any other information that may be requested by the Program Administrator from time to time.


6.2 Timing. An Eligible Executive must make a Deferral Election with respect to an Option (i) at least six (6) months prior to the date such Option will be exercised, and (ii) prior to the calendar year in which such Option will be exercised. The Program Administrator may establish limited Deferral Election periods during which Eligible Executives must make Deferral Elections. Deferred Options may only be exercised within the last two months prior to the date the term of the Option is scheduled to expire. Notwithstanding anything in this Program to the


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contrary, in the event a Participant's Option is expected to expire prior to its stated term (e.g., due to the termination of the Participant's continuous status as an employee), the Deferred Options must be exercised during the two month period ending on the date the Option is expected to expire.

7. General Provisions Relating to Bonus and Stock Deferral Elections.


7.1 Separate Elections. A separate Deferral Election must be made by an Eligible Executive for each Bonus or Stock Option Gain deferral. If an Eligible Executive fails to file a properly completed and executed Election Form with the Program Administrator by the prescribed time, he will be deemed to have elected not to defer any Bonus or Stock Option Gain for the applicable Program Year.


7.2 Irrevocability of Elections. An election is irrevocable once ...