Which Java version I should be compiling my applets for?
It depends.
Are most Microsoft browsers still stuck at 1.1?
Yes.
In my opinion,
you should compile your applets for 1.1 unless you realize a need for a class/method that is beyond that.
As far as the reliability of the -target switch, I've compiled some classes with that switch and they seemed to work fine in the older (1.1.4) JVMs of IE5.5 and NN4.7
However, I've also compiled some classes with that switch which contained methods which were from the 1.3 JDK. They compiled just fine, but wouldn't run unless I used the plug-in.