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:
...do 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.