Ballmer memo: Microsoft plans unprecedented boost in employee compensation, simpler reviews

Microsoft CEO Steve Ballmer. (Microsoft photo)

Microsoft CEO Steve Ballmer this morning signaled a broad set of changes in how the company’s employees are evaluated and compensated — promising to simplify its performance review process, boost its overall investment in compensation “across the board,” and shift a portion of compensation away from Microsoft stock awards to give employees more cash up front as part of their base salary.

“These changes represent the most significant investment in overall compensation we have ever made,” Ballmer wrote in an internal email to employees, obtained by GeekWire.

The changes come as Microsoft fights to recruit and retain talent vs. Google, Facebook and other younger rivals in the technology business.

“Our ability to deliver great value to our billions of customers is driven by the ideas and passions of our employees,” Ballmer writes in the memo. “Through our history, we have been THE place people came when they wanted to make a difference in the world through software, hardware and services. This is as true today as it has been at any time in our history, and the changes we’re rolling out today will help ensure Microsoft continues to be the place that top talent comes to change the world.”

Here’s how the memo explains the changes …

Reviews. We are retiring our current system (commitment rating and contribution ranking) and moving to a single performance rating with clear rewards. We are making this change so all employees see a clear, simple, and predictable link between their performance, their rating, and their compensation. Each rating at each level will now have set compensation tied to the rating.

These ratings will be based on the results you accomplished during the review period (assessed against your commitments), how you accomplished them, and your proven capability. Ratings will be a simple 1-5 system with relative performance being assessed across common peer groups.

Compensation. We are increasing our investment in compensation across the board.

The following changes will take place at review this September:

* For all employees, we will have merit increase opportunities aligned with local market dynamics and performance rating.

* We will make important increases in compensation for specific populations where the market has moved the most – early and mid-level R&D, mid-level company-wide and certain geographies.

* For all employees, we will shift a portion of stock award targets into base salary, providing more cash up front and obvious incremental employee value. Senior leaders will continue to have a large portion of their overall compensation in stock to ensure their compensation is heavily tied to the financial performance of the company.

* We are increasing funding for our bonus and stock awards so we can deliver 100% or more of target bonus and stock awards to 80% of our eligible employees. This is up from about 50% in prior years. The additional funding ensures our approach continues to support higher payouts to top performers.

Some of the changes, such as the overhaul in the employee review process, seek to address longstanding complaints from Microsoft’s rank-and-file workers.

Ballmer’s memo doesn’t indicate the overall impact on Microsoft’s corporate spending. The company reports its quarterly earnings a week from today, and its executives could give more indication then.

Since the recession, the company has been focusing heavily on keeping operating expenses low to boost profit margins. After years of rapid expansion, the company’s net employee growth has slowed to a trickle in recent quarters.

The new focus on more cash up front, and less on stock awards, underscores the fact that the company’s share price has been stagnant overall for many years, providing less of the reward that it once did as part of employee compensation. It’s a continuation of the changes that began in 2003 when Microsoft shifted away from stock options to straight stock awards for employee compensation.

Update, 8:55 a.m.: The changes are significant enough to bring the anonymous Mini-Microsoft employee blogger back to his blog. He gives the new review system, well, a mixed review.

  • JTH

    so fast to leak~

  • Anonymous

    Sounds like a smart move.

  • Guest

    more cash, less stock? hmmm, as an “investor” I don’t know if I want employees’ eyes off the valuation ball anymore than they already are…

    • Guest

      Employees eyes came off the valuation ball back in 2003 when MS moved away from options.

      • Anonymous

        Since 2000 employee stock has been underwater, so options have been meaningless since about 1999. I started in 2000, and 5 years later my options were worth -$500,000. Yes, I owed them a half million dollars on paper. 

      • Anonymous

        Since 2000 employee stock has been underwater, so options have been meaningless since about 1999. I started in 2000, and 5 years later my options were worth -$500,000. Yes, I owed them a half million dollars on paper. 

  • Anonymous

    Nice, I never thought about it like that before. Wow.
    http://www.complete-privacy.au.tc

  • Anonymous

    Interesting article after the news story last night that MS is unwilling to provide short term disability to an 11-year employee having brain surgery for a tumor. The timing is interesting. Ballmer should step up to the plate and reverse MS decision. After years of good service to MS the guy gets one bad review while battle brain cancer and MS bases its determination on that. Sounds to me like there is little heart left at MS.

  • Insider

    Dear Guest,

    Totally understand your sentiment but current high performers (and sought after external talent) are turning away from MSFT for more cash elsewhere. MSFT will always be at a competitive disadvantage with startups stock wise, so I’d rather give them the cash vs. settling on less talented folks to replace them. Given the lack of employee control/impact on MSFT stock, I think this is a much better motivator to do great work.

    • Guest

      If MS had the systems in place to let talented people do great work, it wouldn’t have failed in so many new markets and its stock wouldn’t have collapsed over the last decade. It’s not clear how throwing more money at high performers solves that problem. 

  • http://www.facebook.com/lawlam Lawrence Lam

    It would pay for increased health care costs

  • http://www.facebook.com/profile.php?id=100001728072052 Paul Undernet

    Microsoft, hire me!!

  • Aidanhadley

    Ballmer should boost company innovation instead. That might do a better job of stemming the exodus than simply boosting salaries.

    • john

      Wp7, Windows 8, Skydrive, Xbox, Bing, etc…… they do innovate.

      • Guest

        Wp7 – failing in the market
        W8 – unclear whether it will succeed, especially in the now critical tablet market
        Skydrive – good product that almost nobody uses
        Xbox – basically the same platform for the past number of years. Only real innovation has been Kinect, and that’s based on technology from a company in Israel
        Bing – barely growing share and losing 3/4 billion per quarter

        MS R&D $9 billion/yr
        Apple R&D $1.5 billion/yr

        Nuf said.

        • lenin lukose

          WP7 failing ? Every prediction out there says it will be the no.2 by 2015 , it takes time to increase marketshare. By the way in all the markets it got released its the fastest adopted mobile platform.

          Windows 8 – I dont want to say anymore than a point, dont even think competition will be anywhere near ! you also know that well !

          Bing – Starting market share of google was near 90% but now Google is coming to 65-70% , Microsoft market share is increased to almost 30% so we know where the story goes.

          SkyDrive is a product which augments value for other products.

          XBOX is there any competition woth noticing ? No.

          Just face realities.

    • Guest

      Cut 20% of employees and 40% of management. Used the money saved to better compensate those who remain. That would speed decisions and provide motivation.

  • http://www.facebook.com/kmorrill Kevin Morrill

    This is ironic. It sounds like they’re back to their scale using throughout the 90s and early 2000s, which was also on a scale of 1-5 (with most falling between 3-4).

    • http://twitter.com/danshapiro Dan Shapiro

      It looks like the curve is much more spread out than it used to be, though:
      7% 5, 13% 4, 40% 3, 20% 2, 20% 1.

      (from the minimsft blog)

    • http://twitter.com/Vroo Vroo (Bruce Leban)

      No, it’s entirely different! In the old scale, 5 was the top. In the new scale, 5 is the bottom.

      • Guest

        Magical.

  • BT7

    I think vendors should get a pay increase too!

  • http://www.geekatsea.com Kirill Zubovsky

    Just found this article, and I think that although not stupid, this move isn’t going to do too much for MS. There are studies which suggest that financial incentives are only good for repetitive work. In other words, if MS wants to snatch smart and driven engineering, who otherwise go to Google and Facebook, Microsoft needs to change their culture, and empower the employees, rather than just throw cash at them. By offering higher salaries, they would only attract lazy and mediocre engineers, while the really good ones will continue leaving for companies where the work is challenging, innovative and rewarding.

  • asok

    So he basically admits that his policy of chipping away at employee benefits over the past years was ill-conceived. Too late though. All the good employees have already left.

  • PISSEDOFF SOFTIE

    Bye Bye STEVE.  You screwed up my retirement and hoarded all the wealth. Now you are screwing up the company that my family died to help build.  Weeding out the 50′s isn’t going to look good…they have been with you since the rough days.  Get real dude.  GET OUT. 

  • Anonymous

    That’s why I left. That, and a terrible working environment. I finally gave my boss an ultimatum, make me a new job offer with a challenging position or I’m out. The new offer was terrible, and in fact insulting. So I left, and when I did I made a prediction. I said within 5 years I could start my own business and at least match my current salary with no year end reviews, and no crap from MS on a daily basis.

    So I left. And when I did, if I had purchased my stock options, I would have owed MSFT $500,000 after 5 years of work. I refused to convert my stock, and even sent a letter to HR insisting that I had no interest in giving up my options for pennies so that MSFT could take them off the books. The whole conversion thing was to make their books look better, not to help employees.

    Five years later I’m making as much as I was there, with much less stress and a better future outlook financially and psychologically.

    The lesson: take a dump on people working for you and they’ll go somewhere else to be successful.  A large portion of the smart, talented and motivated employees will move on.

  • Anonymous

    That’s why I left. That, and a terrible working environment. I finally gave my boss an ultimatum, make me a new job offer with a challenging position or I’m out. The new offer was terrible, and in fact insulting. So I left, and when I did I made a prediction. I said within 5 years I could start my own business and at least match my current salary with no year end reviews, and no crap from MS on a daily basis.

    So I left. And when I did, if I had purchased my stock options, I would have owed MSFT $500,000 after 5 years of work. I refused to convert my stock, and even sent a letter to HR insisting that I had no interest in giving up my options for pennies so that MSFT could take them off the books. The whole conversion thing was to make their books look better, not to help employees.

    Five years later I’m making as much as I was there, with much less stress and a better future outlook financially and psychologically.

    The lesson: take a dump on people working for you and they’ll go somewhere else to be successful.  A large portion of the smart, talented and motivated employees will move on.