Microsoft board shrinks Nadella's 2016 stock award

Microsoft CEO Satya Nadella. 

CEO gets $7.9M in shares as part of year's pay package, or 60% of target set when he was hired

Microsoft's board of directors earlier this month downsized the stock award portion of CEO Satya Nadella's 2016 compensation package compared to the year before, according to documents filed with the U.S. Securities and Exchange Commission (SEC).

Although Nadella's full package for the fiscal year -- Microsoft's began July 1, 2015, and will end June 30, 2016 -- won't be disclosed until October 2016, the board pegged the stock part at approximately $7.9 million in a Sept. 15 filing with the SEC.

That was 60% of the $13.2 million that the board set as the target for Nadella's annual "equity award" when it hired him in February 2014.

(The dollar amount of Microsoft executives' equity awards can be calculated by multiplying the number of shares by the closing price on the last business day of August, the date the firm uses for all its top leaders' annual grants. On Aug. 31, 2015, Microsoft's shares closed at $43.52.)

Data: SEC

 Microsoft's board cut the stock award portion of the 2016 compensation packages of several top executives, reducing the grants to between 60% and 81% of the previous year's bonuses.

Microsoft, like most companies, sets targets for top executives' non-salary compensation: In Microsoft's case, that consists of cash bonuses and annual stock awards. The target amounts can be reduced by the board of directors as it evaluates executives.

"Performance metrics can be anything you want them to be," said Bob Buford, a Portland, Ore.-based compensation consultant. They can be financially oriented, operations oriented or based on whether the executive is outperforming their peers at other companies, he explained.

When Nadella was hired last year, the board set his 2015 salary at $1.2 million, his cash bonus target at $3.6 million -- the maximum 300% of his salary -- and his annual target equity award at the number of shares equal to $13.2 million. That third segment vests over the following four years.

Thus, for Microsoft's fiscal year 2015, Nadella was expected to make about $18 million, assuming he met performance goals. Nadella was awarded shares equal to $13.2 million in September 2014 as the equity portion of his compensation for fiscal 2015, with the first part of it vesting this year. Microsoft will reveal Nadella's 2015 cash bonus next month, when it files its annual proxy statement with the SEC.

Other top Microsoft executives' equity awards for 2016 fell too, according to SEC documents. Kevin Turner, the company's COO, was presented shares equal to $6.3 million earlier this month, or 66% of the $9.5 million he was given in 2014. Another top executive, CFO Amy Hood, was handed shares equal to $5.1 million, or 81% of the previous year's award. And Brad Smith, who was recently promoted to president, was awarded $3.9 million, or 78% of what he got last year.

It's also possible that Microsoft's board has reduced or will reduce Nadella's cash bonus for fiscal 2016. In last year's proxy statement, the board said it, "targets delivery of at least 70% of total direct annual compensation opportunity for the Named Executives in the form of stock awards to align executives with our shareholders."

If Nadella's 2016 cash bonus also declined to 60% of last year's $3.2 million, or to $2.16 million, his total compensation would be $11.28 million. The $7.92 million in stock grants would be exactly 70% of that.

The SEC filing this month did not spell out why Nadella's stock award was reduced to 60% of the target.

Because all of the top people whose 2015 and 2016 equity awards Microsoft has reported to the SEC saw their numbers fall, Buford said it was probably more because the executive team as a whole missed company-wide goals than it was about pointing fingers at any individual.

"One has to conclude that performance was less than what they expected," said Buford, referring to Microsoft's past year.

While Microsoft's stock was down 6% on the last day of August 2015 compared to 2014, the company's board pays more attention to peer pay packages than to metrics like stock price, said Buford. "They pay a lot of attention to peers," he noted.

Perhaps more important than a stock price swing was the Redmond, Wash. company's dismal June quarter, when it posted a $3.2 billion net loss due to the massive $7.6 billion write-off of the Nokia acquisition. Although it was Nadella's predecessor, ex-CEO Steve Ballmer, who pushed through the Nokia deal, Nadella was tasked to execute on the firm's mobile device strategy.

There is precedent. In 2012, Microsoft's board gave Ballmer 91% of his target cash award and Steven Sinofsky -- at the time the head of Windows -- 90% of his target, while others at the top tier received 100% or more of their bonus targets.

In the proxy statement that year, Microsoft cited a number of factors in Ballmer's lower award, including a 3% decline in Windows revenue. Meanwhile, Sinofsky also took heat from the board for the 3% downturn in his division's revenues, and was also called out over its failure "to provide a browser choice screen on certain Windows PCs in Europe as required by its 2009 commitment with the European Commission." That blunder cost Microsoft a $732 million fine levied by European Union antitrust officials, who were angry that the company breached a prior agreement.

"In any case, it was a poor performance of whatever [the board is] measuring," Buford concluded of Nadella's below-target equity award.