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Some heralded the JP Morgan-Microsoft stock options deal in 2004 as the start of a compensation revolution. But with reports the US bank lost money delta-hedging the transaction, and with the SEC rejecting Cisco Systems' new valuation proposal, out-of-the-money employee stock options continue to vex. By Navroz Patel

Two years ago, millions of Microsoft employees faced a tough decision. Working with JP Morgan, the Washington-based technology company had created a deal whereby staff that wished to sell all their employee stock options could do so. The complication was that the value of the options would only be determined after their decision had been made. The average stock price for a 15-day period ending December 8, 2003 was used in the option valuation. Nearly 345 million derwater – that is