The software maker's struggle to keep good people is nothing new. The company admitted earlier this year that it raised compensation for its Silicon Valley employees by 15 percent because of intense recruiting competition and the high cost of living in the area.
But Redmond, Wash.-based Microsoft faces increasing pressure as its stock dives following a federal judge's ruling that it violated antitrust laws.
Microsoft has good reason to increase incentives and bolster salaries, "which tend to be below industry standards," said Gartner Group analyst Michael Gartenberg. The software maker has typically rewarded employees with stock options rather than fat paychecks. But given the stock decline and anticipated future performance, more is needed, he said.
Increased incentives include extra vacation time and huge stock-option grants--more than 200,000 shares in some cases--as well as increased promotions, which include generous increases in salaries. Recent promotions have added more than 30 vice presidents to Microsoft's management team.
"Microsoft is constantly looking, and always looking, to ensure compensation is competitive and make sure people are not only recognized for the work they do but are appropriately rewarded," said a company representative.
In early February, Microsoft instituted a 15 percent pay raise for full-time employees living in Silicon Valley. In the past, Microsoft's practice was to set salaries based on the cost of living in Redmond no matter where the employee lived. Microsoft said that recent economic hot spots have justified setting salaries by region.
"The people who came to Microsoft even a few years ago--even with the stock now at $75--are doing quite well," Gartenberg said. "This is a preemptive strike to make sure recent employees can still benefit and make sure key employees still get a sense they're part of the team. Microsoft is cognizant its key assets all have feet."
Microsoft also may have to adjust its corporate culture, which fosters 90-hour workweeks, if it wants to retain top managers, particularly as they add families to their priorities.
The more recent incentives and wage increases indicate the toll the government's antitrust case is taking on the software maker. The allure of high-flying "dot coms" coupled with falling stock prices has sapped morale and has made it less compelling for employees to hang around until they can cash in their shares.
A Microsoft representative disagreed with the contention that recent events spurred compensation changes. "Neither the (antitrust) case nor the stock market has any factors on these decisions. These are programs that Microsoft has been working on and proceed anything that happened in this antitrust case."
Gartenberg isn't so sure. "If you've been getting paid below market salary, and you've been working 90 hours a week and doing this on the basis Microsoft's stock is going to go up, and the stock price is going down, you suddenly discover you've been working very, very long hours for below market wages," he said.
In a recent report, Gartner Group concluded, "Microsoft will have increased difficulty attracting and retaining talented workers because of its tarnished image, low morale, languishing stock price and the appeal of unencumbered dot-com start-ups."
Ongoing legal problems, including a rash of civil lawsuits, "combined with less-motivated employees and a fiduciary responsibility to avoid further legal action, will make Microsoft's corporate culture less aggressive during the next 10 years," according to Gartner Group.