MSFTextrememakeover

Saturday, September 22, 2007

Change, or more of the same? It's up to YOU.

It's proxy season again. And thanks to new corporate compensation rules, you'll find more detail than ever in this year's document. For example, you'll learn that while CEO Steve Ballmer may have been unable to get the trains to run on time, invest in areas that actually return a profit, catch major new trends, restore confidence, or get this moribund stock moving despite record buybacks using our cash, he was paid less than most CEOs to do it. The Board, in their collective wisdom, think that constitutes being "underpaid". I think it proves the old adage "you get what you pay for"
 
The proxy also gives the deepest glimpse yet into the mysterious formulas and metrics which underpin the so-called Shared Performance Stock Award (SPSA), indelicately referred to as the "executive feeding trough" from time to time by a certain shareholder blogger. In particular, you'll learn that senior most leadership walked away with millions each, because the company aims to pay "above the median" for such top talent (read: way above). However, that was only half what they could have received. The Board, you see, may sit idly by as you and I continue to lose money on our investment. But they want you to know they're no pushover:
 

We were satisfied with our performance in product acceptance and SMSG and MBD financial metrics. Our performance in customer satisfaction, while steady, and Internet searches, while growing, fell short of our challenging goals, and we were not satisfied with our performance in EDD financial metrics.

BTW, that last one is a euphemism for "even we understand that we can't be seen to condone another $1B loss of shareholder cash - on top of the mind-blowing $5B lost so far - even though it resulted from a strategy we approved of rushing a product to market without adequate testing". Hmm...think that disappointment translated into maybe zero SPSA payout for H&E head Robbie Bach? Doesn't say. Here's my wild-ass guess: "No".

Steve and the Board also want you to know that part of the reason for the large compensation payments is too retain these key individuals. Apparently folks who collectively can't lead, execute, or inspire, are in high demand. Go figure.

Along the way you'll learn that the stock price is not part of the extensive SPSA metrics. What's that line again about "you get the performance you request and reward"? However, rest assured that the general Compensation Philosophy includes this objective:

provides a significant portion of total compensation linked to achieving performance goals that we believe will create shareholder value in the near and long term

Just in case the stock being down 50% since 2000 and having badly underperformed all major indexes and most peers this entire decade has caused you to er... maybe question the value of their beliefs?

Also, be advised that the massive insider selling which has become the hallmark of MSFT post 2000 - and a frequent topic here - has now caused sufficient embarrassment that the usual "we don't comment on sales by our executives" is no longer sufficient. From now on, executive officers will be forced to keep a multiple of their salary in company stock (3-10X base pay depending on level). Doesn't that just fill you with confidence that the supposed "creme de la creme" of MSFT management need to be forced to hold this stock? And don't worry about our fearless leader Ballmer:

Because his interests are already closely aligned with shareholders’ interests...

Again, in case that wasn't as um...obvious from the stock's decade-to-date performance as it might be.

Also intriguing is what's not in the proxy. If you're a regular reader of it, you'll recall this chart which has appeared annually and compares MSFT to the S&P and NASDAQ (apologies for the image quality):


Apparently, even the extreme creativity that has been used to draw the scale historically is no longer sufficient to mask the chronic underperformance. And since reminding shareholders of how badly they've done while detailing how much management got paid for doing it is bad form - not to mention potentially career limiting - POOF!it's gone. And with it, final abdication of responsibility by current leadership for the stock - something that's been evident for years, but is now seemingly official.

All in all, this proxy has all the spin, half-truths, non-sequiturs, outright fiction, and disdain for reader's intelligence worthy of say, a recent Vista "Momentum" press release. Since I want to be constructive, here's how we can radically improve and streamline it while also saving a few thousand trees. Instead of wasting pages and pages on excuses and justifications for lavish compensation in the face of abject failure on behalf of shareholders, simply provide us with one page containing two items: 

1) A 5-year stock chart comparing MSFT to the S&P and NASDAQ indices (drawn using normal scale):

2) A clear choice:


Simple, huh?

And for all those hotshot managers whom the Board is paying millions to because they're so worried about retaining them, and who have to be forced to hold the stock, I say "quit". PLEASE. In many cases, the best possible development for Microsoft would be to have some of you go to the competition and screw them up instead. I'll happily take some less-senior person who actually still believes in the company, has vision, and can inspire others.

Alternatively, if despite the demonstrated lack of confidence you're all truly convinced that your strategies - which the street hates - are actually brilliant, then march on down to your local bank consortium and pitch them on lending you $270B (less Bill & Steve's share if they're willing to go along), plus say a 20-30% premium. Then you can buy us out and take the company private. That way, if you continue to execute as you have, it will be coming out of your dime instead of ours.

Fellow shareholders, the ball's in your court. You know which way I'm voting.

29 Comments:

  • I've always thought that if executives, especially at a company the size of MSFT, are doing a good job, they're worth almost anything you pay them. On the other hand, if they're not doing a good job, they'd be overpaid working for free.

    By Anonymous Anonymous, at 10:40 AM  

  • Spot on as always. You left out the bits about Liddell relo package and the subsequent cost to MS from his home in CT.

    And seriously, you do the math and it's amazing. Honestly, to have these execs grouse about how little they get paid "in comparison to other CXO types"...is the epitome of greed. While there are those of us that can't even find a home in the Puget Sound within striking distance of campus...or afford to shop anywhere besides Target...and these guys complain about getting $2M+ in a bonus this year. Suck it up morons, we sure do.

    By Anonymous Anonymous, at 1:29 PM  

  • I don't necessarily disagree with your stance on any of this, but with the continuing troubles that you see why do you continue to be a stockholder? Are you "holding out" for the next big bump that might nor might not come? That's not very savvy investing, IMHO.

    You also seem to assume that your proxy vote means anything. unless you are a board member or a major investor it won't matter.

    MSFT stock is almost entirely owned by institutional investors who don't want the stock to move too much either way. They use it as a stabilizing factor in their portfolios. As far as they, and the board, are concerned the management is doing a great job. MSFT is a monopoly on the desktop and as long as they have cash in the bank they are "safe". This situation won't change any time soon, regardless of who the boss is.

    I love reading your views on the state of things, but at some point you need to cut your losses and move on. MSFT is no longer a growth stock. It's a stable stock and should be treated as such. Sorry.

    By Anonymous Anonymous, at 4:57 PM  

  • MSFT stock is almost entirely owned by institutional investors who don't want the stock to move too much either way. They use it as a stabilizing factor in their portfolios.

    That's not very savvy investing, IMHO.

    Some of us get a small but not insignificant portion of our pay via MSFT stock, or perhaps still hold stock from options or ESPP from pre-2002, and would like that "investment" to grow.

    I personally think this company is worth considerably more than its current market cap, but ongoing mismanagement drags the stock down. If I knew a better way to advocate changes to management I'd be all over it. As things stand, I'm limited to voting my proxy and using what I learn (from here, among other places) to educate my fellow shareholders.

    By Anonymous Anonymous, at 10:23 AM  

  • "MSFT stock is almost entirely owned by institutional investors who don't want the stock to move too much either way."

    Hogwash.

    By Anonymous Anonymous, at 12:02 PM  

  • "You left out the bits about Liddell relo package and the subsequent cost to MS from his home in CT."

    Also the % of comp based on search and the role it may have played in that end-of-year unsustainable search promo, the fairly ridiculous (imo) shareholder submissions to be voted on, etc. Hard as it may be to imagine given how long my posts often are, I almost always drop areas that are worth mentioning in a failed attempt at brevity. WRT the house, it seems like a ton of money to have lost. But such programs are standard fare for many large companies.

    By Blogger MSFTextrememakeover, at 1:04 PM  

  • I like your stock price graphs, can we also see revenue and profit growth graphs? I want to see how our revenues and profits compare to those we're comparing ourselves too, i think it is another interesting part of the story.

    By Anonymous Anonymous, at 12:26 AM  

  • "can we also see revenue and profit growth graphs?"

    MSFT

    By Blogger MSFTextrememakeover, at 8:19 AM  

  • This comment has been removed by the author.

    By Blogger Vikas Agarwal, at 11:17 AM  

  • They can't even ship Ultimate Extras when they promised and these bozos are getting bonuses?

    By Anonymous Anonymous, at 11:22 AM  

  • I heard that Msft is in talks with facebook to buy 5% stake for about 600 Mil? This would make the valuation of facebook to over 10Bil. Considering revenues of facebook are only 100mil a year, does it seem like 1999 all over again or its just me.
    ROIC of microsoft has been soo pathetic that I would prefer that they follow Birkshire Hathaway model of investing cash in other more profitable avenues. If management can not do justice to shareholder value then they should return the cash in the form of dividend. I can certainly beat 5% ROIC that Microsoft has shown over past few years. With BillG, Paul Allen and SteveB holding majority of stocks, I don't know when will enough be enough and we will get some new blood in microsoft instead of same old lazy asses cashing their stocks grants and sipping pinacolada in their Tuscany villa.

    http://www.valueinvestmentblog.com/

    By Blogger Vikas Agarwal, at 11:25 AM  

  • Hear, hear! Well said.

    If there's anyone at Microsoft with the guts to take Vista out behind the barn and shoot it, that's the guy who should be running the show.

    http://www.news.com/8301-10784_3-9785337-7.html

    By Anonymous Some Guy, at 9:10 PM  

  • Since MSFT is no longer a growth stock, it's time for it to be a dividend stock. There's no shame in that, it's the right thing for a company to do when it's hit market saturation.

    SteveB, quit spending billions of dollars of shareholder's money on your ego trips like Xbox and trying to beat Google, and crank the dividend up. The company is earning billions per quarter, and it should be paying billions in dividends.

    By Anonymous Some Guy, at 9:13 PM  

  • MSFTextrememakeover, you are a moron.

    We are underpaying our executives. That's why we have them. There is saying, you get what you paid for. I wish we can pay our executives a lot more. It will be well worth it. Microsoft pays too much compensation to low rank employees and too little to executives.

    By Anonymous Anonymous, at 11:19 PM  

  • "There is saying, you get what you paid for."

    Yeah, it sounds vaguely familiar somehow...

    "I wish we can pay our executives a lot more. It will be well worth it."

    Paying them a lot hasn't been worth it for shareholders so far this decade. Why will paying them even more provide different results now? I'm all for paying more for results. I'm not for paying even more for continued failure. Call me a capitalist.

    "Microsoft pays too much compensation to low rank employees and too little to executives."

    Considering that the the percentile comp level for regular employees is lower than for senior executives, facts do not appear to be on your side.

    By Blogger MSFTextrememakeover, at 10:14 AM  

  • MSFTextrememakeover, the same guy here.

    You need to learn some financial courses too. Paying to executives primarily for performance bring moral hazard condition. In such a scenario an executive is likely to take risky bets.

    Play a online stock market game with fake money. The richest person at the end of the game gets a prize. What behavior will you see?

    Executives should be paid primarily for their talent. A handsome bonus can be added for results. Presidents getting less than $10M is pity amount. Each president is equivalent to a ceo of a big company. Microsoft must pay more to its presidents if it wants to see results. Not the other way around. Low level employees are also paid money to get the results. Not the other way around.

    By Anonymous Anonymous, at 9:35 PM  

  • "In such a scenario an executive is likely to take risky bets."

    What do you call investing $20B+ on Xbox to lose $6-7B and counting? The issue isn't pay. Microsoft is paying its senior management plenty. They simply aren't [collectively] delivering. Paying them even more, imo, will not result in better strategies or execution.

    By Blogger MSFTextrememakeover, at 8:10 AM  

  • I can say it in your words. Paying more for those positions will result in better employees there. Paying for performance will bring even more risk.

    By Anonymous Anonymous, at 10:00 AM  

  • If I'm reading this right, what the non-msftextrememakeover poster is saying isn't "I wish MSFT could pay the current management more." but that MSFT could pay more to attract new and better talent. MSFT sucks at growing its own great leadership (they tend to shoo it away, from what I've seen) so they're going to have to buy/hire it from the outside.

    I thought that one of the things MSFT bought when they bought Aquantive was their CEO. My guess is he'll be "heads-down" in online advertising for a year or maybe two and then you'll see some BIG changes in the executive ranks.

    I don't have any inside information, but it's certainly been done before in other places.

    By Anonymous Anonymous, at 7:20 AM  

  • "If I'm reading this right, what the non-msftextrememakeover poster is saying isn't "I wish MSFT could pay the current management more." but that MSFT could pay more to attract new and better talent."

    If that's what he meant he was exceedingly unclear about it. Regardless, while I agree that MSFT needs to attract new and better talent in some key areas (CEO role #1), they also need to change the culture so that both new and existing talent can thrive. Indeed, on a sheer numbers basis the latter is much more impactful. Hence one of the reasons I think we need a new from outside CEO who will bring with him/her cultural change. Again, I don't think this is about pay per se, and the findings of the Board's compensation committee support that conclusion. However, I have no problem paying more as long as results become evident shortly thereafter. WRT the former CEO of AQNT, yeah I did a post at the time which included this article about him. Seems to have a very solid background. One new player like that in the CEO role and we might see real change.

    By Blogger MSFTextrememakeover, at 9:53 AM  

  • I think we need a new from outside CEO who will bring with him/her cultural change.

    Yes, absolutely.

    As far as

    I can say it in your words. Paying more for those positions will result in better employees there. Paying for performance will bring even more risk.

    The commentor needs to take a more careful look at the situation. MSFT doesn't have bad execs because they're unwilling to pay for good ones. They have bad execs because they chose bad execs. They didn't pick Jim Allchin over Brad Silverberg because Allchin was willing to work cheaper.

    Being willing to pay for top talent, and being able to identify top talent, are not the same thing. Microsoft has certainly been willing to pay a lot of money for executives. It has not yet shown any real ability to identify the right ones to hire or promote. The result is that over the last few years, MSFT has sometimes paid a lot of money for poor performance, and sometimes paid relatively little money for poor performance.

    I'm afraid the commentor is trying to solve the wrong problem.

    By Anonymous Anonymous, at 7:21 PM  

  • I am ok with the millions an executive can be paid. They are executives because they did something right in the past to get there (i am hoping). What I am not ok with is the MSFT culture of not holding them accountable immediately. If it were another company and you lost it 10 million in 1 quarter, you better have a DAMN good reason for it, otherwise you are fired. So as an executive, as long as you are making the company good money, you should be rewarded good too, however, the moment something goes down, you go down with it i.e. Zero stock/bonuses, possible termination etc.

    By Anonymous Anonymous, at 3:50 PM  

  • The poster who pointed out the difference between paying for and identifying top talent hit the nail on the head.

    MSFT's CEO is a fifth-rater, whose entire qualification for his current position is having been BG's only friend in college. His track record shows very clearly that if he hires a talented subordinate, it's through sheer luck. The best technical executive MS has ever had was Kai-Fu Lee, and we all know how that turned out. So who are you left with? J Allard and Ray Ozzie? Gag me.

    For those of you who keep downplaying the importance of the stock price, I submit that it's the stock price that's the #2 obstacle to MS attracting top talent. The "work here for five years and get rich" story is over, and has been since Ballmer got the big chair to throw around.

    If you ever want your MS stock to be worth more than index fund shares, you MUST do one of two things: override management and force large, regular dividend payouts, or fire the top six layers of management and start over with a Lou Gerstner or someone of similar abilities.

    By Anonymous Some Guy, at 5:47 PM  

  • Well I did it. For over a decade I've blindly given my proxy over to BillG and crew. This year I didn't. I voted against the entire board.

    Am I throwing the baby out with the bathwater? Perhaps. Maybe we have a decent board member or two. I doubt it though. Guilt by association.

    The real problem is, it was a waste of time to do the extra button clicks. I don't have enough shares to matter. More importantly, there was no one to proxy my shares to who would matter.

    My shares are a pittance. Our (all of us together) shares are probably a pittance. But I'd at least like to see a Carl Icahn like investor I could proxy them to.

    Hell, if we had a shareholder activist I might even have a reason to keep the shares I receive.

    By Anonymous Anonymous, at 11:05 PM  

  • "We are underpaying our executives"

    Thanks dude, that's the best laugh I've had since the MSFT stock chart went flat.

    By Anonymous Some Guy, at 11:59 PM  

  • I did my part and voted against the current board of directors in the proxy vote.

    By Anonymous Anonymous, at 10:35 AM  

  • Well I did it. For over a decade I've blindly given my proxy over to BillG and crew. This year I didn't. I voted against the entire board.

    Same here - doesn't make a bit of difference but it felt good.

    By Anonymous Anonymous, at 10:55 AM  

  • Paying executives more makes sense, provided that you spill and fill every single level below the board at the same time. That way you're encouraging new execs to do better than the current bunch of bozos.

    Paying the current execs more just tells them that the stock price is meant to be a flat line, and that growth is not for Microsoft. That the X-Box and Zune are successful money-generating wins for the company. That current behaviour is exactly and precisely what's needed, and that more of the same is a good thing.

    You don't want to reward failure, so the only sensible route is to dump all executive staff at all levels and re-hire at better pay.

    It's extreme, but that's the blog's name!

    By Anonymous Anonymous, at 6:39 AM  

  • Anonymous 6:39 am said...
    You don't want to reward failure, so the only sensible route is to dump all executive staff at all levels and re-hire at better pay.

    It's extreme, but that's the blog's name!


    You actually have a legit point there. Consider for a minute that Microsoft's senior management completely forgot who their customer for Vista was.

    It should have been a slam-dunk that the person paying for the OS was the customer. Apparently in management's mind, digital media owners are the customer, and the OS licensee is simply a pirate that the OS should protect digital media from.

    When management implies that your former customers are now thieves, it is time to bring in a group that isn't adversarial.

    By Anonymous justmy2¢, at 2:44 PM  

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