The announcement means a break from traditional customer rebates, which have historically come from the manufacturer or the retailer.
In the new program, "Microsoft Live Search," Microsoft, as the publisher of the Internet ads, would be offering a portion of its ad revenues to generate rebates.
Microsoft Chairman Bill Gates introduced the plan Wednesday at a meeting of Microsoft advertisers.
"Our goal is to make Live Search the most rewarding commercial destination on the Web," Gates said.
"We believe this is a major development in the evolution of search marketing," said WPP Chief Executive Officer Martin Sorrell.
Microsoft has lined up major retailers including WPP, Abe's of Maine, B&H, Circuit City, Backcountry.com, Foot Locker, Barnes and Noble, The Home Depot, OfficeMax and PetSmart to participate in the venture, the statement said.
The initiative is a push to increase Microsoft's advertising presence on the Internet, which is expected to become a $335 billion a year retail outlet by 2012.
The announcement also comes within weeks of Microsoft's failed $47.5 billion bid to purchase search engine Yahoo! Inc.