What Microsoft's executive compensation metrics say about its priorities

Microsoft CEO Satya Nadella earned nearly $26 million in overall compensation this past year. Here's how Microsoft calculates his and other top executives' pay.
Written by Mary Jo Foley, Senior Contributing Editor on

Last week, Microsoft made available its 2018 proxy statement. That document makes for interesting reading for us Microsoft watchers, and not just because it includes the annual executive pay numbers for the company.


CEO Satya Nadella earned $25.8 million this past fiscal year, which is $5 million above what he earned the previous year. Like Microsoft's other top ("named") executives, Nadella's total compensation includes salary (7.6 percent of the total); cash incentive (19.4 percent); performance stock awards, or PSAs (36.5 percent); and four-year vesting stock awards (36.5 percent).

When calculating PSAs, Microsoft uses a list of top priorities for its executives. That list shows what the company's directors value, from a strategy and product standpoint. Here's what's on the current 2018 PSA priorities list:

  • Commercial cloud revenue (weighted 34 percent)
  • Commercial cloud subscribers (33 percent)
  • Windows 10 monthly active devices (11 percent)
  • Consumer post-sales monetization gross margin (11 percent)
  • LinkedIn sessions (6 percent)
  • Surface gross margins (5 percent)

"Fiscal year 2018 PSA performance metrics are strategic measures that align with our mission and purpose and are aimed at driving new growth areas for our commercial and consumer businesses," according to the proxy. "These metrics were selected because they address areas that support long-term growth of our business by focusing on our emerging growth opportunities and align with our three reporting segments and customer base."

The inclusion here of commercial cloud net revenues and subscribers doesn't surprise me, given Microsoft's strategy is to grow its cloud and subscription businesses. Incorporation of Surface gross margins (excluding the Surface Hub, for some reason) also doesn't really surprise me, even though Microsoft has not done a full-on press to try to grow its Surface business at a rapid clip.

Credit: Microsoft

Inclusion of the Windows 10 monthly active devices number -- which was stalled for a good part of this year at close to 700 million (and officially just hit 700 million last month) is more surprising to me, given Microsoft's public de-emphasis of Windows in its marketing campaigns. The addition of LinkedIn sessions is interesting, given Microsoft officials have said publicly that they are largely leaving LinkedIn alone and letting that business run itself. Microsoft added the LinkedIn metric in FY18; in FY17 it wasn't on the list. (Instead, Surface gross margins made up 11 percent share of the total.)

The consumer post-sales monetization metric -- which includes Search, Store, Display/Homepage, Gaming and Office Consumer/Services -- is definitely a head-scratcher. Yes, Microsoft is actively working to grow all of these categories, but many of us company watchers have come to believe that Microsoft isn't really all that intent on pushing the consumer side of its business, as Microsoft increasingly seems to be emerging as an enterprise company.

Microsoft officials recently began an effort to regain lost consumer mindshare via its ""Modern Life Services" work, but given Microsoft's decision to drop a number of its consumer products and services over the past couple of years, this will likely be an uphill battle.

Credit: Microsoft

On the cash incentive front, 50 percent of executives' compensation here is calculated based on performance rated against financial, operational and strategic indicators in three categories: Product and strategy; customers and stakeholders; and culture and organizational leadership. (The culture category is where all that Microsoft diversity, inclusion and employee morale stuff falls.) Nadella earned 165 percent of his targeted goals on these fronts.

Microsoft's FY18 annual report also is now available. Its annual shareholders meeting is scheduled for November 28.

Microsoft will be reporting earnings for the first quarter of its fiscal 2019 on Wednesday, October 24. Don't forget that some of LinkedIn's revenues will be included in Microsoft's "commercial cloud" tallies, going forward.

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