Monday, August 28, 2006

Pay for performance or performance for pay?

I'm a big fan of Mini-MSFT and therefore check out his site fairly frequently. I encourage other shareholders to do likewise. The other day, he linked to a post which failed to make his cut but caught my attention nevertheless. You can find it here. It's from a rather irate MSFT shareholder (are there any other kind?) and the author didn't hold back on what he saw as employee whining - which perhaps explains why he/she ended up on Mini's cutting room floor. But one of the more valid points was this one: the work to make customers and stockholders happy and we'll reward you by increasing your stock price. it'll pay off in espp AND your stock awards.

Mini's comment on the [entire] post was as follows:

Chicken, egg, vicious cycle and motivating benefits. How does it all come together? Don't you have to have stock to be motivated to raise it? And don't you first need to be motivated to buy / acquire stock?)

I think that's a good question, and one I'll return to shortly. Meanwhile, several other comments in the latest Mini thread (which didn't get cut) also speak to this general topic of employee vs shareholder rewards. The most concerning one being this:

I really don't care about the shareholders. Their goals and mine are no longer aligned. My goal is to get promoted, increase my pay and get as many stock awards as possible (I dump these as soon as they vest).

Now, of course, this might have been an ABM troll versus an actual employee (Yes Dorothy, we're not in Kansas anymore), and let's hope so, since the alternative it to believe that MSFT hired such a dumbass and, in turn, several other dumbasses are on the payroll who hired him/her. But wait, it gets worse. A later response (same moron perhaps?) reads :

Employees asking for "fair" compensation has nothing to do with shareholders. Shareholders would like it if everyone worked for free. Shareholders are not being forced to hold MSFT stock at gun point.

Employee compensation has "nothing to do with shareholders"? Hey genius, who do you think underwrites those costs via lower earnings and a depressed stock price? I also take issue with the comment that shareholders "would like it if everyone worked for free". Over the past 5 years, in addition to one of the highest aggregate compensation costs in the industry, shareholders have underwritten literally $10B's in additional employee-related costs. These started with additional options grants in 2000, followed by across-the-board salary increases [note: could only find one link but there have been several iterations and company-wide], the multi-billion dollar options trade-in program, the move to grants (which just happened to be accompanied by the extremely favorable restatement of previous financials), and the recent perks - to name but a few. Along the way, the company did cut some benefits, including the infamous towels, in a bid to save $1B in expenses - a move that was roundly criticized. And, in fairness, there are also those who contend that even current salaries still lag the industry. However, the fact remains that billions in additional employee compensation costs have been underwritten by shareholders during a time period where they've seen the value of their investment decrease by over 50%.

Which brings me back to Mini's chicken vs egg scenario. Which is it: is MSFT not performing because employees aren't being paid enough, or have the payments been made but the performance not been forthcoming? As you might have gathered - especially if you cheated and read my comment to Mini about this post - I tend to come down on the side of the latter, but then I look at it from a macro perspective vs individually. I'm sure that not all employees are being well-compensated - particularly low to mid-level ones - but overall compensation is as high as anyone. I also appreciate that the market doesn't always do a good job of reflecting inherent value and that it only makes sense during those periods to keep compensating employees to keep morale high and increase the chances of long-term success. But how much and how long is enough? This has been going on for 5 freakin years now. In fact, MSFT's stock is flat since 1998. Imagine owning a coffee shop (or xyz other business) that hasn't earned you a penny since 1998, despite you underwriting the hiring of tons more staff, the payment of decent salaries to most and outrageous ones to management, AND numerous expensive steps during that time to either increase or stabilize employee compensation. Worse, each successive change and related charge was sold by management as a move to "better align" employees with your needs. How receptive would you be at this point to employee requests for still further compensation in order to show you a return? At what point would you just fire your existing management team and hire a new one instead, cut your operating costs by dramatically pruning headcount, or simply sell your underperforming coffee shop? This is, after all, meant to be a win:win situation - not one one where employees win but owners lose. Again, in fairness, some employees seem to get this (from Mini's thread comments again):

I am starting to get depressed reading the stream of comments. To the outside world I am afraid (I had a few friends read the comments before writing this) we are looking like spoilt brats who only care about compensation. I know it is that time of the year when we find out what our rewards are for the work we did all year. But before you post, please try to think about a shareholder who bought the shares of the company in early 2000 or 2001. We have not delivered anything - nada to these folks. And some of them are nowhere as young or well off as most MSFT employees.

I also think MSFT senior management should take some responsibility for their abysmal performance rather than expect shareholders to bend over further, and redirect some of the massive compensation this largely underperforming group is receiving and distribute it more fairly across the majority of employees. For example, should Jim Allchin, the guy ultimately tasked with getting Vista out the door, have been able to vest some $40M+ of stock over the past year alone, despite overseeing the biggest screw-up in MSFT history? Would that money have been better invested across general employees who, in addition to being more motivated, might actually have had enough confidence in the company's future to hold those shares vs sell them? Or how about the rumor that they've just awarded their 600-odd top managers 101% on their SPSA awards for their performance over the past 3 years - a period that saw the company notch its slowest growth year ever, fail to deliver Vista, grossly underperform every major market index, and execute at a level that made management generally look like the Keystone cops? Now admittedly, the company has grown revenue - and to a much lesser degree earnings - during that period. So some bonus was in order. But how can you possibly defend a 100%+ bonus when you failed so miserably to reward owners? And if there's effectively no penalty for failure in that regard, what's the incentive to avoid continuing to underperform in the future? Bottom line, I think the days of "pay me more and I'll perform" are over. At this point, MSFT needs to demonstrate that what it's already collectively paying is justified, despite most operating - and all market - evidence to the contrary.


  • At a company the size of Microsoft, exactly how is a "rank and file" employee supposed to be motivated? The chances that their individual performance will impact the stock price, even the most insignificant amount, are nill. What that one commenter said - that they do not care what the stockholders preferences are - makes more sense than you give it credit. Let me explain:

    Down where I am (SVC campus), they cut the "geographical difference" bonus from 25% to 15% a few years ago. It was, essentially an (around) 8.5% pay cut for all of us. When employees correctly pointed out that the cost of living was not going down, the company (also correctly) pointed out that employee pay is based on the employee market, not the cost of living.

    And frankly, that is the exact same situation employees are in in regards to what the stockholders want/need. The same way the COMPANY doesn't care about our cost of living, we don't care about your profits! If MSFT wants the best employees in order to move the company forward, they are simply going to have to pay for them based on the market price.

    Not that I support what seems to be rewarding middle and upper management no matter what happens. It does seem there is very little accountability. But you complaining about perks... come on! The employment market (for good employees) is still quite tight, we have a hard time holding on to a lot of our good employees. Core compensation simply CANNOT map to company performance, particularly when personal performance will have no impact on the company!

    By Anonymous Anonymous, at 3:11 PM  

  • I've been at Microsoft since 1994. I was lucky enough to get a small number of stock options (small in comparison to many people at MS), and did reasonably well with them before the big drop.

    Before then, everybody was happy. Stockholders got some nice appreciation, rank and file employees got nice stock options, and upper management got rich. Really rich.

    But after the bust, the wrong thing happened. The stagnant stock meant that nobody was getting anything above salary and bonus.

    That led to discontent at MS, and led to the stock award program. This looks like a good idea, as it reduces the dilution that stockholders had been dealing with during the big run-up.

    The big problem is that it totally decoupled the compensation of the upper managers from the stock price, or from any reasonable measurement of success.

    That has led to the current situation, where there are partners who stand to get 500,000 shares in the near future, in reward for meeting their "goals".

    That, my friend, is where the real abuse is, and I'm amazed that the stockholders aren't more pissed off about this.

    I don't understand what your point is. Are you expecting the rank-and-file employees to compromise because their management isn't on the ball? I've tried to change what I can, but I have virtually zero effect on the what the managers 5 levels up decide to do.

    Every year, around review time, I look at what my group is like - what work I do, how much hassle there is in my life, how much chance there is to do something cool, and my compensation, and figure out whether to stay or go elsewhere.

    You can say that the employees should perform for their pay, and try to get the company to enact that policy. And then you can watch as the top 10% - the collective soul of the company - leave for greener pastures.

    And then you're screwed.

    What MS needs is some real management accountability.

    By Anonymous Anonymous, at 9:35 PM  

  • This is a long post and tough to wade through. But I'll give you a VERY brief summary.

    Microsoft is suffering from MASSIVE employee malaise. Truly a small percentage of these people are malcontents and probably should leave. But there is a HUGE majority that if they had empowering managers and GREAT pay, they would kick it up a notch and stick. I know I would. I do have a great manager, I hear he's leaving. I'm not talking about "good" pay, or "better"...I'm talking about GREAT pay. Take $1B of that money that is disappearing into Web 2.0 (WTF) projects in MSN and give it back to employees. And do that every year. Lay off some of those employees that just live to produce that single slide deck every quarter, and distribute their salary among those that remain. Do something big. A person grossing 100K per year should see an instant 20% raise.

    I say they need to stop the malaise and towels are not enough. You must stuff that green paper into the wound.

    By Anonymous Anonymous, at 11:05 PM  

  • On the MiniMSFT thread there was a response to the “shareholder value isn’t my concern” comment that got pretty close to the issue.

    … managers and leads are the ones to determine what's best for the shareholders and translate that into marching orders for the ICs. The performance review model is, in theory, a way to get ICs to what their managers want which should … serve to increase shareholder value…I don't know how to personally deliver shareholder value. I know very little about the whims of the stock market. I do now how to improve my product…

    I’d bump it up a level or two, but the sentiment is right. The executives are the ones who should focus on shareholder value and the ICs and line-level leads focus on execution against the strategies their leaders set out.

    I’ll leave it to others to decide if executives are rewarded for attention to shareholder value, but ICs are not generally rewarded for execution against objectives. IC compensation is based more on subjective “potential” than objective accomplishment. Promotions and stock awards go to those who seem most able to take on larger challenges. Of course that makes sense, but the enormous disparity in compensation between those judged “average” MSFT and those judged “outstanding” causes people to lose focus on current execution as they try so very hard to show potential for their next job. MSFT has created a culture where “doing your job competently” just isn’t good enough. Predictably, this means doing your job well is not valued. Doing my job makes me fall behind inflation. Is it any wonder we have problems with execution?

    By Anonymous Anonymous, at 11:44 AM  

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