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Satya Nadella
Satya Nadella

Microsoft’s new CEO, Satya Nadella, will receive between $14.4 million and $18 million in annual compensation — comprising a base salary of $1.2 million, a stock award of $13.2 million and a potential cash award as high as $3.6 million, which will depend on the Microsoft board’s assessment of his performance.

The company laid out the compensation plan in a regulatory filing this afternoon, following the announcement of Nadella as its new CEO earlier this morning.

Nadella will significantly outearn his predecessor, Steve Ballmer, who received an annual salary of $697,500 and a bonus of $550,000 in 2013. Ballmer, already one of Microsoft’s largest shareholders, did not take stock compensation as part of his compensation package, and his overall compensation was unusually low.

By comparison, the average annual compensation for CEOs at top tech firms is about $19.1 million, based on the calculations used by Microsoft’s board as a benchmark for Nadella’s compensation.

But in addition to the annual compensation, Nadella will also be eligible for more stock awards based on the company’s performance relative to the S&P 500 over the next seven years. The complicated formula for the “Long-Term Performance Stock Awards” is laid out in this exhibit.

In very basic terms, Nadella could get about 1.8 million shares total over the next seven years, if the company hits the target (with the potential to earn more or less if the company exceeds or misses the target). That’s about $65 million over the seven years based on Microsoft’s closing share price of $36.35 today, but there are so many variables in that equation (share price, performance, etc.) that the potential range is very wide.

Bottom line, the idea is to align a large chunk of Nadella’s overall compensation with shareholder value, while keeping his total annual compensation in line with or just below industry norms. About 73% of his total target compensation is in Microsoft stock.

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