Will Microsoft's overhaul of its employee review system boost morale?

Microsoft CEO Steve Ballmer announced to the troops on April 21 plans to overhaul the company's employee review and compensation system.
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft CEO Steve Ballmer announced to the troops on April 21 plans to overhaul the company's employee review and compensation system.

Microsoft is hoping the changes will stem employee defections and help the company attract new talent. It's also counting on the changes, due to be implemented starting this September, reducing employee disgruntlement with the stagnant stock price, one of my sources said.

One of my contacts sent me what he said was the text of the Ballmer memo. (I'm asking Microsoft if it's real, but I believe it is.)

Update: A Microsoft spokesperson said this is the real deal. Here's the text in full:

There are many things that are true about Microsoft. We have big goals, big dreams and big aspirations for the future. We have great products and services. We have great people. We are competitive both with our products and in the way we attract and retain talent. For me, the most important factor is competition for talent, because I know our success comes from the people who work here.

Attracting and retaining great talent has at least three critical components: enabling and supporting people doing exciting and innovative work, creating a great environment where people can grow and be recognized, and providing the right overall compensation. In the same way we continuously improve our products and services, we must also improve the ways we support and reward our talented people. In line with that, today we're announcing changes that will benefit our employees by sharpening the clarity of our performance review process and increasing compensation. These changes represent the most significant investment in overall compensation we have ever made.

Reviews. We are retiring our current system (commitment rating and contribution ranking) and moving to a single performance rating with clear rewards. We are making this change so all employees see a clear, simple, and predictable link between their performance, their rating, and their compensation. Each rating at each level will now have set compensation tied to the rating.

These ratings will be based on the results you accomplished during the review period (assessed against your commitments), how you accomplished them, and your proven capability. Ratings will be a simple 1-5 system with relative performance being assessed across common peer groups.

Compensation. We are increasing our investment in compensation across the board.

The following changes will take place at review this September:

For all employees, we will have merit increase opportunities aligned with local market dynamics and performance rating. We will make important increases in compensation for specific populations where the market has moved the most -- early and mid-level R&D, mid-level company-wide and certain geographies.

For all employees, we will shift a portion of stock award targets into base salary, providing more cash up front and obvious incremental employee value. Senior leaders will continue to have a large portion of their overall compensation in stock to ensure their compensation is heavily tied to the financial performance of the company.

We are increasing funding for our bonus and stock awards so we can deliver 100% or more of target bonus and stock awards to 80% of our eligible employees. This is up from about 50% in prior years. The additional funding ensures our approach continues to support higher payouts to top performers.

The easiest way to understand these changes is to look at how you could be affected here.

There is a lot of information available about these changes on HRWeb and via conversations with your manager.

One of my tipsters explained the change this way: "Basically, they're giving up on stock growth all together as a motivator and shrinking that down while cranking up cash both base pay and bonuses. Yet another new review model that is supposedly simpler. Will be interesting to see how it effects earnings and morale."

Update: Anonymous Microsoft blogger Who 'da Punk of Mini MIcrosoft fame weighs in on the just-announced changes.

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