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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.

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