The Director Compensation Project: Microsoft Corporation

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3).

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the Microsoft Corporation (NYSE: MSFT) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards* ($)	All Other Compensation** ($)	Total ($)
Dina Dublon	115,000	135,000	--	--	250,000
William H. Gates III	90,000	135,000	--	--	225,000
Raymond V. Gilmartin	103,723	135,000	--	--	238,723
Reed Hastings	96,277	135,000	--	--	231,277
Maria Klawe	90,000	135,000	--	--	225,000
David F. Marquardt	102,500	135,000	--	--	237,500
Charles H. Noski	115,000	135,000	--	--	250,000
Helmut Panke	115,000	135,000	--	--	250,000

*Microsoft does not award stock options to its executive officers.

**This column includes the company’s matching contributions to 401(k) plans and imputed income received from broad-based benefits programs, which includes life insurance, disability insurance and athletic club memberships.

Director Compensation.  Microsoft’s board of directors met eight times during the 2011 fiscal year. All directors attended 75 percent or more of the total number of all board and committee meetings of which they were members. Five directors attended Microsoft’s annual shareholders’ meeting in 2010. Microsoft strives to pay directors close to the market median for similar director positions, but most compensation was conferred through equity. Director compensation had remained stable for five years but dropped to lower than the Dow 30 median by 15 to 20 percent. To bring compensation back in line with company goals, the board raised its base director compensation from $200,000 to $250,000.

Director Tenure.  Mr. Ballmer has headed several Microsoft divisions during the past 31 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President. He was subsequently named Chief Executive Officer in January 2000. Mr. Gates and Mr. Marquardt hold the longest director tenures, having served as directors since 1981, while Ms. Klawe joined the board most recently in 2009. Mr. Hastings is also the Chief Executive Officer and founder of Netflix, Inc. and continues to serve as a director in that company. Ms. Dublon simultaneously serves on the boards of Accenture Ltd. and Pepsico, Inc. Microsoft’s Corporate Governance Guidelines provide that a substantial majority of directors must be independent; therefore, the independent directors annually appoint a lead independent director to coordinate their activities. Mr. Hastings has served as lead independent director since December 2010.

CEO Compensation.  Microsoft’s compensation philosophy seeks to encourage executive success through competitive base salaries and extensive stock ownership with purchase options based upon executive tenure and position-specific performance metrics. The company believes that this compensation structure aligns the interests of executives with maximizing profit for shareholders while reducing unnecessary risk taking. B. Kevin Turner, Chief Operating Officer, and Steven Sinofsky, President of the Windows and Windows Live Divisions, were the highest paid executive officers at $9,277,141 and $7,207,758, respectively. Mr. Gates, as founder and Chairman, owns the most shares of common stock at 540,979,055, representing a 6.41 percent ownership of the company. Chief Executive Officer Steven Ballmer holds 333,252,990 shares of Microsoft common stock, representing a 3.95 percent ownership of the company. Based on his personal request, Mr. Ballmer is not paid for serving as a director, choosing instead hold a substantial number of shares of stock, tying his personal wealth to Microsoft’s value.