UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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SCHEDULE 14A
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Microsoft Corporation
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November 16, 2015
Dear Shareholder,
First and foremost, thank you for your continued investment in Microsoft.
As we look ahead to our annual shareholders meeting on December 2, 2015, I would like to update you about developments at Microsoft over the past year, and ask for your support on the proposals that will be presented at our annual meeting. The accompanying presentation provides additional detail on these topics.
2015 Developments
Microsoft continued to make progress on its strategic transformation as our CEO Satya Nadella worked to refine the Company’s strategic focus, prioritizing talent and investments in areas where we have differentiation and potential for growth. Throughout this transformation, the Board and management team have remained focused on and committed to executing on our strategic goals and creating value for our shareholders. In fiscal 2015 we increased:
| • | Total revenue 8% |
| • | Commercial Cloud revenue 106% |
| • | Quarterly dividend 11% |
| • | Total cash returned to shareholders by nearly 50% to $23.3 billion |
The Board and leadership team were also responsible for three important developments over the past 12 months:
| • | Evolution of Executive Compensation. Last year in our proxy statement we said we were committed to developing performance metrics and long-term incentives as part of the annual incentive award structure for our executive officers. The Compensation Committee followed through by working with management to implement a new program for our current fiscal year that explicitly ties executive incentives to specific performance measures aimed at driving long-term performance and value creation. These performance measures align with the evolution of Microsoft’s business and key long-term objectives and provide greater accountability and transparency. As part of this process, we engaged a wide range of shareholders who provided important input that was considered in constructing the changes for the new program. |
| • | Adopted Proxy Access. The Board’s decision to adopt proxy access grew out of an open and constructive dialogue with our shareholders and Microsoft’s commitment to maintain strong governance practices. The “Proxy Access for Director Nominations” bylaw permits eligible shareholders to nominate candidates for election to the Microsoft Board. |
| • | Nominated Two New Independent Directors. Microsoft has a regular practice of adding new directors who can provide new and diverse perspectives and complementary skills. We have nominated for election at the upcoming meeting Sandra Peterson, Group Worldwide Chairman at Johnson & Johnson, and Padmasree Warrior, formerly Chief Technology and Strategy Officer at Cisco Systems. We are excited about the new experience and insights they will bring to the Board. |
Annual Shareholders Meeting Items
At the December 2 annual meeting, our shareholders will vote on three management proposals.
| • | Election of eleven directors. Our director nominees represent an engaged, skilled group of individuals with the experience and expertise to help guide Microsoft through its next chapter of innovation. These nominees include two new independent directors as described above. The average director tenure of the slate of directors is six years. There is more information about all of our Board nominees in our proxy statement and on page 5 of the presentation. |
| • | Advisory vote on named executive officer compensation. Our executive compensation program remains heavily weighted toward equity compensation to align our executives with the long-term performance of our company and with our shareholders’ interests. With the changes taking effect in 2016, over half of Satya Nadella’s pay opportunity will be tied to specific long-term performance metrics. More information about our executive compensation program can be found in our proxy statement and on pages 6 through 11 of the presentation. |
| • | Ratification of auditors. The Audit Committee has selected Deloitte & Touche LLP as the independent auditor for fiscal 2016. |
The Microsoft Board of Directors encourages you to vote FOR each of these management proposals.
This year we partnered with iiWisdom to deliver an interactive version of our proxy statement that is available on our Investor Relations website. Our interactive proxy statement improves our shareholders’ ability to efficiently access and consume the proxy content they find most important using an interactive, easily navigable framework.
As we approach our annual shareholders meeting, the Board and I invite you to write us at AskBoard@microsoft.com about corporate governance or the board of directors. We sincerely value continued feedback from our shareholders and appreciate the importance of thoughtfully considering a diversity of perspectives as we work to deliver long-term value. This letter and the accompanying presentation is part of our ongoing commitment to transparency and finding methods to communicate with you.
I appreciate the opportunity to serve Microsoft on your behalf.
Sincerely,
John W. Thompson
Chairman of the Board
Microsoft Corporation
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Shareholder Update
November 2015
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Agenda
Continuing Our Strategic Transformation
Mission and Strategy
Business Momentum and Performance
New Director Nominees
Executive Compensation
Fiscal Year 2015 Executive Pay
Evolution of Executive Pay for Fiscal Year 2016 and Beyond
Best Practices in Corporate Governance
Proxy Access
Governance and Compensation Best Practices
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Continuing Our Strategic Transformation
Our mission is to empower every person and every organization on the planet to achieve more. This mission is at the core of what our customers deeply care about; we have unique capability in harmonizing the needs of both individuals and organizations.
Business Strategy
Build best-in-class platforms and productivity services for the mobile-first and cloud-first world.
The transformation we are driving across our businesses is designed to enable Microsoft and our customers to thrive in this world.
We will realize our mission and strategy by investing in three interconnected ambitions:
Reinvent productivity and business processes
Build the intelligent cloud platform
Create more personal computing
Microsoft |
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Business Momentum and Solid Financial Performance
Commercial Cloud revenue grew 106%, reaching an annualized revenue run rate of over $8 billion.
Completed development and testing for Windows 10; released on July 29, 2015, now with over 110 million active Windows 10 devices.
Increased Azure revenue and compute usage over 100% in the fourth quarter year-over-year.
Bing search advertising revenue grew 22%.
Office 365 consumer subscribers grew to over 15 million, with users growing at nearly 1 million per month at fiscal year end.
Total Cash Returned to Shareholders
$4.61
0
10%
20%
30%
40%
50%
60%
70%
8.67%
35.05%
57.17%
1 Year
2 Year
3 Year
(in billions)
$25
$25
$15
$10
$0
$4.61
$7.70 $9.27
$6.41
$13.21
$10.06
48%
FY13
FY14
FY15
Dividend
Buyback
TSR (%)
$93.6 billion 8%
3-Year Revenue and EPS
*FY14 and FY15 EPS is non-GAAP; adjusted for impairment, integration and restructuring expenses
Microsoft | 4
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Accomplished Director Nominees
Evolving Board Composition
Sandra Peterson
(Nominated for election in December 2015)
Group Worldwide Chairman,
Johnson & Johnson
Responsible for Johnson & Johnson’s Consumer Group of Companies, and Johnson & Johnson Supply Chain, Information Technology, Wellness and Prevention, and Global Strategic Design. She brings extensive operating experience with global companies, product and marketing experience, and expertise with strategy development. Ms. Peterson has significant information technology experience, financial knowledge and understanding of how to run highly-regulated businesses.
Padmasree Warrior
(Nominated for election in December 2015)
Former Chief Technology and Strategy Officer, Cisco Systems, Inc.
She was responsible for Cisco’s worldwide business and technology strategy, mergers and acquisitions, equity investments, and innovation; charged with aligning technology development and corporate strategy. She has wide-ranging experience as a technical leader addressing silicon, hardware and software development challenges. Ms. Warrior brings significant experience in driving technology and operational innovation across a global company, and in forging growth through strategic partnerships and new business models.
Microsoft |
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Compensation Philosophy
Five core tenets inform the design of our executive compensation program
Competitive Pay Opportunity
We pay competitively to attract, motivate, and retain the executives who drive our success and industry leadership
Equity Incentives
At least 70% of annual target pay opportunity is in equity to incentivize a long-term focus and strong alignment with shareholders
Sustainable Long-term
Performance
Large majority of total pay is subject to multi-year vesting or performance requirements
Explicit Pay and Performance Link
We explicitly tie pay to performance by delivering a large majority of pay through performance-based incentives
Compensation Governance
We discourage unnecessary and excessive risk-taking through our vesting and stock holding requirements and clawback provisions
Our executive compensation philosophy and structure create strong alignment with our long-term strategic goals and the interests of our shareholders
Microsoft | 6
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Compensating a Global Technology Leader
FY2015 Opportunity
Aligned to business performance and shareholder interests
Annual Base Salary
Annual Cash Incentive Award
Long-term Incentive Plan Award
Total Annual Target Compensation
$1,200,000
Target of $3,600,000
Ranges from 0%-300% of target based on actual performance as evaluated by our Board
$13,200,000 annual equity award with four equal vesting periods
$18,000,000
FY2015 Results: In line with Microsoft performance and peer group CEO compensation
46th percentile of peer group
104% of target total compensation
120% of target bonus
13.33% of maximum bonus
The annual compensation for Mr. Nadella reflects the demands and responsibilities of leading a global organization with the scope and stature of Microsoft, and the fierce competition for talented executives in the technology sector
Microsoft | 7
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FY15 Peer Company CEO Pay
FY15 CEO Total Compensation: Rank v. Peers*
QUALCOMM, Inc.
Oracle Corp.
The Walt Disney Co.
Yahoo!, Inc.
General Electric Co.
Exxon Mobil Corp.
The Boeing Co.
JPMorgan Chase & Co.
Chevron Corp.
Merck & Co., Inc.
Johnson & Johnson
The Coca-Cola Co.
AT&T, Inc.
Pfizer Inc.
American Express Co.
Goldman Sachs…
The Travelers Cos., Inc.
Cisco Systems, Inc.
3M Co.
HP, Inc.
Wal-Mart Stores, Inc. Microsoft at
IBM Corp.
Microsoft Corp. 46th
Adobe Systems, Inc.
Procter & Gamble Co. percentile
Verizon…
Caterpillar, Inc.
Symantec Corp.
NIKE, Inc.
Accenture Plc
UnitedHealth Group,…
E.I. du Pont de…
Intel Corp.
EMC Corp.
The Home Depot, Inc.
United Technologies…
*Based on last available summary compensation table data from
Apple, Inc. peer proxy statements, excluding all other compensation
Visa, Inc.
McDonald’s Corp.
Amazon.com, Inc.
Facebook, Inc.
Alphabet, Inc.
Microsoft at 46th percentile
Microsoft | 8
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Executive Compensation Program Evolution
Compensation Program Evolution was Informed by Shareholder Input
The Compensation Committee made changes to further link pay with objective performance measures that align with Microsoft’s strategic goals and long-term objectives.
Key 2016 Program Changes Include
Introduced performance-based stock awards linked to key financial measures (50% of target annual equity incentive)
Added Relative TSR multiplier to reward significant outperformance
90% of annual total target compensation is now variable based on performance
Reduced maximum cash bonus to increase long-term focus (300% to 200%)
56% of CEO total equity is performance based
No change in CEO total target pay for 2016
2016 compensation program reflects a significant increase in the percentage of compensation tied directly to objective performance measures
2015
Annual Base Salary
9%
Variable Annual Cash
Incentive Award
18%
Time-Based Stock Award
73%
2016
Annual Base Salary
9%
Variable Annual Cash
Incentive Award
18%
Performance-Based
Stock Award
36.5%
Variable Time-Based Stock Award
36.5%
Note: graphic excludes Other Compensation
Microsoft |9
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Long-Term Incentive Pay Tied to Rigorous Metrics
Performance-based stock awards further enhance the link between executive pay and Microsoft’s long-term performance
Overall 2016 Compensation Structure
Microsoft’s pay mix targets a high proportion of equity and performance-based compensation
NEO Pay Mix
9%
18.0%
36.5%
At Risk
36.5%
Stock Awards
Performance Stock Awards
Bonus
Salary
Financial (50%)
3-yr Aggregation of Annual Revenue Plan (25%)
3-yr Aggregation of Annual Operating Income Plan (25%)
Strategic (50%)
FY18 Commercial Cloud Annualized Revenue Run Rate (16.7%)
FY18 Commercial Subscribers
(16.7%)
FY18 Win 10 Monthly Active Devices (16.6%)
Relative TSR multiplier is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500
Microsoft | 10
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Performance Stock Award Payout Opportunity
Payout Curve for Each Metric
Performance Stock Award Payout Opportunity
No payout earned unless threshold performance is achieved for at least one metric
TSR Multiplier
Payout opportunity ranges from 0% to 400% of the target number of shares, including the TSR multiplier, which establishes accountability for underperformance and incentivizes out-performance.
Microsoft | 11
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Proxy Access
Microsoft’s Board is committed to strong corporate governance practices, establishment of meaningful shareholder rights and robust engagement practices
In August 2015, we adopted a “Proxy Access for Director Nominations” bylaw, which permits eligible shareholders to nominate candidates for election to the Microsoft Board. Proxy access candidates will be included in the Company’s proxy statement and ballot.
The proxy access bylaw provides that
holders of at least 3 percent of Microsoft’s outstanding shares, which can comprise up to 20 shareholders,
holding the shares continuously for at least 3 years,
can nominate two individuals or 20 percent of the Board, whichever is greater, for election at an annual shareholders meeting.
Microsoft | 12
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Leader in Governance and Compensation Best Practices
Progressive Governance Practices and Shareholder Rights
Directors are elected annually
Regularly refresh Board; average director tenure is 6 years
82%+ of our director nominees are independent and all are highly qualified
Separate chairman and CEO roles with an
independent chairman
Proxy access bylaw
Majority voting for director elections
(one of the first adopters in U.S.)
Annually evaluate the performance of the Board, its committees, and each director
Simple majority vote provisions to amend bylaws/charter
Shareholders holding 25% of our shares have the right to call a special meeting
Robust shareholder outreach practices
History of responsiveness to our shareholders’ feedback
Effective Compensation Governance
Aggressive executive compensation recovery policy to ensure accountability (clawback policy)
Executive stock ownership requirements
(ranging from 3x-10x base salary)
Anti-hedging and pledging policy
Independent compensation consultant advises our Compensation Committee
Responsibly manage the use of equity compensation
No stock options
No special perquisites or benefits (no tax gross-ups, club memberships, car allowances, or special medical benefits)
No employment contracts
No change in control protection
No special retirement program
No guaranteed bonuses
Microsoft | 13