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Microsoft boosts cash compensation for employees

The software giant tacitly acknowledges that its stock performance isn't strong enough to retain its best workers.

Microsoft's Steve Ballmer Microsoft

Microsoft took another step toward middle age, shifting a significant piece of its employee compensation from stock to cash, implicitly acknowledging that its stock performance isn't enough to retain top talent.

CEO Steve Ballmer sent an e-mail to the company's 90,000 employees this morning, outlining a new compensation and review process. The company is significantly scaling back its stock awards for employees, replacing that with cash. And it's revising the complex review system in an effort to create a much clearer link between performance, rating, and compensation.

"Our ability to deliver great value to our billions of customers is driven by the ideas and passions of our employees," Ballmer wrote. "Through our history, we have been THE place people came when they wanted to make a difference in the world through software, hardware and services."

The changes seem to recognize the lure of younger tech companies that draw the kinds of employees Microsoft once did. While Microsoft remains a top spot for college grads, recruiting tables for Google and, more recently, Facebook often draw larger crowds.

Through the late 1990s, Microsoft was minting millionaires with its stock-option program. But as Microsoft has matured, compensation has been a core gripe for employees. The legend of the "Microsoft millionaire" is the stuff of corporate history books these days. Microsoft's shares have traded sideways for most of the last decade. Employees have been working for a paycheck and little else.

The company tried to address the issue in 2003, shifting for offering big stock options, which weren't paying off, to more modest stock grants, which had real value even if the stock didn't climb. More over, those grants, which vested over time, guaranteed that employees would benefit if Microsoft's stock climbed.

But with the S&P 500 index outperforming Microsoft's shares in that time, even those stock awards had dubious value. Employees privately grumbled that they could do better investing the money put toward stock awards on their own.

It's a sentiment that Mini-Microsoft, an anonymous employee blogger, noted in a post about the new compensation plan today. "Forget that Microsoft stock because it's dead in the water and today's Microsoft employee is all about the paycheck," Mini wrote.

In his note, Ballmer included a few specifics. The company will boost compensation significantly in "early and mid-level R&D," in hopes of retaining and luring employees key to new product development. It will also boost compensation for "certain geographies," mostly likely places such as China and India, where Microsoft is in fierce competition for tech talent.

And while Microsoft is shifting from stock awards to cash, the most senior leaders at the company will continue to have a large portion of their overall compensation in stock so that they're vested the financial performance of the company.

Microsoft is also boosting funding for bonus and stock awards. The goal is to give 80 percent of eligible workers 100 percent or more of their target bonus and stock awards. That's up from 50 percent in previous years.