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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No. __ )

 

Filed by the Registrant

Filed by a Party other than the Registrant

 

Check the appropriate box:

 

   Preliminary Proxy Statement
   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
   Definitive Proxy Statement
   Definitive Additional Materials
   Soliciting Material Pursuant to §240.14a-12

 

Microsoft Corporation


(Name of Registrant as Specified In Its Charter)

 

 


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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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Table of Contents

 

 

LOGO


Table of Contents

LOGO

Fiscal Year 2019 Highlights

Microsoft works to conduct business in ways that are principled, transparent, and accountable to our shareholders and other key stakeholders. We believe doing so generates long-term value. As we work to help everyone achieve more, we are committed to improving our world and reporting our progress. Our fiscal year 2019 business performance and corporate responsibility results include:

 

     

 

    Business Performance    

 

     
     
      GAAP      
   
   

$125.8 billion

 

 

$43.0 billion

 

 

$39.2 billion

 

 

$5.06

 

   
   

Revenue (up 14%)

 

  Operating income (up 23%)   Net income (up 137%)   Diluted earnings per share (up 138%)    

 

 

Non-GAAP

   
   
   

$125.8 billion

 

 

$43.0 billion

 

 

$36.8 billion

 

 

$4.75

 

   
    Revenue (up 14%)   Operating income (up 23%)   Net income (up 22%)   Diluted earnings per share (up 22%)    
   

 

Percentages are year-over-year. See Annex A for a reconciliation of financial measures presented under accounting principles generally accepted in the United States of America (“GAAP”) to non-GAAP financial measures.

 

   

 

   

 

 

 

    Corporate Responsibility    

 

 

 

   
     
   
   

100%

 

 

$1.5 billion

 

 

Global Privacy Protections

 

   
   

Carbon neutrality achieved by our global operations every year since 2012. We are on track to reach our goal of sourcing 60% of the electricity used by our datacenters from renewable sources by the end of this year.

 

  Value of products and services granted to nonprofits worldwide via donation and discount programs.  

Voluntarily extending key European Union

privacy rights to people around the world.

   

 

   

    Note About Forward-Looking Statements    

 

   
     
   

This Proxy Statement includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the Proxy Summary and Part 2 – “Named Executive Officer Compensation.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Forms 10-K and 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

 

   


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LOGO

Letter from our CEO

October 16, 2019

Dear Shareholder,

On behalf of the Board of Directors, it is our pleasure to invite you to the 2019 Annual Shareholders Meeting of Microsoft Corporation (“Annual Meeting”), on December 4, 2019, beginning at 8:00 a.m. Pacific Time. We have adopted a virtual format for our Annual Meeting to provide a consistent experience to all shareholders regardless of location. We will provide a live webcast of the Annual Meeting at www.virtualshareholdermeeting.com/MSFT19. In addition, you will have the option to view the Annual Meeting through Microsoft Teams at www.microsoft.com/investor. A transcript with video and audio of the entire Annual Meeting will be available on the Microsoft Investor Relations website after the meeting. For further information on how to participate in the meeting, please see Part 5 – Information About the Meeting on page 63 in this Proxy Statement.

The Notice of 2019 Annual Shareholders Meeting and this Proxy Statement contain details of the business to be conducted during the Annual Meeting.

Whether or not you participate in the Annual Meeting, it is important that your shares be represented and voted during the meeting. We urge you to promptly vote and submit your proxy (1) via the Internet, (2) by phone, or (3) if you received your proxy materials by mail, by signing, dating, and returning the enclosed proxy card or voting instruction form in the envelope provided for your convenience.

This year’s shareholders Q&A session will include questions submitted both live and in advance. You may submit a question in advance of the meeting at www.proxyvote.com after logging in with the control number (“Control Number”) found next to the label for postal mail recipients or within the body of the email sending you the Proxy Statement. Live questions may be submitted online beginning shortly before the start of the Annual Meeting. We will post questions and answers if applicable to Microsoft’s business on our Investor Relations website shortly after the meeting.

Thank you for your continued investment in Microsoft.

Sincerely,

 

 

LOGO

Satya Nadella

Chief Executive Officer



 


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LOGO

Letter from the Board of Directors

October 16, 2019

Dear Shareholder,

We appreciate your investment in Microsoft. This past fiscal year offered another record year for financial performance, and Microsoft delivered strong results for our shareholders, including a return of $30.9 billion in the form of share repurchases and dividends. We celebrate these successes and look forward to more opportunity ahead as we remain committed to the long-term interests of Microsoft shareholders.

This year’s Board nominees represent a wide range of backgrounds and expertise. We believe our diversity of experiences, perspectives, and skills contributes to the Board’s effectiveness in managing risk and providing guidance that positions Microsoft for long-term success in a dynamically changing business environment. Of our 13 Board nominees, 11 are independent, which includes our Board Chair and all Committee members.

As part of our ongoing commitment to creating a balanced and effective Board with diverse viewpoints and deep industry expertise, we regularly add new directors to infuse new ideas and fresh perspectives in the boardroom. We are pleased to announce the nomination of Emma Walmsley for election to the Board at our December 4, 2019 Annual Meeting. Ms. Walmsley is CEO of GlaxoSmithKline (“GSK”) and member of the GSK board. She is an accomplished business leader who drove major advances in research and development at GSK and will bring significant insights and global experience to Microsoft.

Charles H. Noski and Helmut Panke have decided that after almost 16 years of service, they will not seek re-election and will end their Board service in December. They have been critical and insightful directors during multiple key moments for Microsoft for more than a decade and a half, and we are grateful for their many contributions.

This Proxy Statement describes Microsoft’s corporate governance policies and practices that foster the Board’s effective oversight of the Company’s business strategies and practices. We encourage you to view our director video series to bring this information to life. The videos provide an opportunity for directors to discuss how we approach our roles and responsibilities and share the unique perspectives we bring to the Board. The series is available at https://aka.ms/DirectorVideoSeries.

Beyond communicating our perspectives, we also believe in the value of listening to our shareholders. During fiscal year 2019, our Board Chair and members of management engaged with a cross-section of shareholders owning over 49% of Microsoft shares. Over the past several years, feedback from shareholders has helped the Board evolve Microsoft’s executive compensation program and further enhance shareholder rights. Shareholder feedback also helps us prioritize our efforts and enhance our transparency on workplace issues and other topics.

As we look to the year ahead, we remain excited about the opportunities Microsoft has in terms of its business, shareholder value creation, and positive impacts at a global scale. Thank you for the trust you place in us and the opportunity to serve you and our Company as directors.

Sincerely,

Your Board of Directors



 


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LOGO

 

 

Notice of 2019 Annual Shareholders Meeting

 

Date     December 4, 2019
Time    

8:00 a.m. Pacific Time

 

 

Virtual Meeting

   

 

This year’s meeting is a virtual shareholders meeting at www.virtualshareholdermeeting.com/MSFT19

 

Record Date     October 8, 2019. Only shareholders of record at the close of business on the record date are entitled to receive notice of, and to vote at, the Annual Meeting.
Proxy Voting     Make your vote count. Please vote your shares promptly to ensure the presence of a quorum during the Annual Meeting. Voting your shares now via the Internet, by telephone, or by signing, dating, and returning the enclosed proxy card or voting instruction form will save the expense of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope with postage prepaid if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares during the Annual Meeting, as your proxy is revocable at your option. We are requesting your vote to:
Items of

Business

   

•  Elect the 13 director nominees named in this Proxy Statement.

 

•  Approve, on a non-binding advisory basis, the compensation paid to our named executive officers (“say-on-pay vote”).

 

•  Ratify the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2020.

 

•  Vote on Shareholder Proposal 1: Report on Employee Representation on Board of Directors.

 

•  Vote on Shareholder Proposal 2: Report on Gender Pay Gap.

 

•  Transact other business that may properly come before the Annual Meeting.

Meeting Details     See Part 5 – Information About the Meeting for details.

 

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on December 4, 2019. Our 2019 Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/investor.

 

By Order of the Board of Directors

 

LOGO

Dev Stahlkopf

Secretary

Redmond, Washington

October 16, 2019

 


 

2019 PROXY STATEMENT  i


Table of Contents

 


Proxy Statement Table of Contents

 

   

Proxy summary

 

    

 

1

 

 

 

  1   

 

 

 

Governance and
Our Board of
Directors

 

 
 
 

     

 

Trust and Governance

     6  
     

 

Board of Directors Oversight Roles

     6  
     

 

Our Governance Structure

     7  
     

 

Director Selection and Qualifications

     14  
     

 

Board Composition

     15  
     

 

Our Director Nominees

     17  
           

 

Director Compensation

 

    

 

25

 

 

 

  2

  

 

 

 

Named Executive
Officer
Compensation

 

 
 
 

     

Compensation Discussion and Analysis

     27  
     

Section 1 – Compensation Governance and Philosophy

     28  
     

Section 2 – Compensation Program Design

     31  
     

Section 3 – Fiscal Year 2019 Compensation Decisions

     33  
     

Section 4 – Other Compensation Policies and Information

     39  
     

Compensation Committee Report

     43  
        

Fiscal Year 2019 Compensation Tables

     43  
        

Summary Compensation Table

     43  
        

Grants of Plan-Based Awards Table

     45  
        

Outstanding Equity Awards at June 30, 2019 Table

     46  
        

Option Exercises and Stock Vested Table

     47  
        

Nonqualified Deferred Compensation Table

     47  
        

CEO Pay Ratio

     48  
        

Equity Compensation Plan Information

     48  
        

Compensation Committee Interlocks and Insider Participation

     49  
        

Stock Ownership Information

     49  
                      

Principal Shareholders

 

    

 

50

 

 

 

  3

  

 

 

 

Audit Committee
Matters

 

 
 

     

 

Audit Committee Report

     51  
     

 

Fees Billed by Deloitte & Touche

     53  
     

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor

     54  
        
        
                      

 


 

ii    LOGO   


Table of Contents

 


 

         
  4   

 

 

 

Proposals to be
Voted on During
the Meeting

 

 
 
 

     

 

Management Proposal 1: Election of 13 Directors

     55  
     

 

Management Proposal 2: Advisory Vote to Approve Named Executive Officer Compensation

     56  
     

 

Management Proposal 3: Ratification of the Selection of Deloitte & Touche LLP as Independent Auditor for Fiscal Year 2020

     57  
     

 

Shareholder Proposal 1: Report on Employee Representation on Board of Directors

     57  
           

 

Shareholder Proposal 2: Report on Gender Pay Gap

 

    

 

60

 

 

 

  5   

 

 

 

Information About
the Meeting

 

 
 

     

 

Date, Time, and Place of Meeting

     63  
     

 

Proxy Materials are Available on the Internet

     63  
     

 

Participating in the Annual Meeting

     63  
     

 

Soliciting Proxies

     64  
     

 

Householding

     64  
     

 

Election of Directors

     64  
     

 

Voting Procedures

     64  
        

Tabulation of Votes

     64  
        

Majority Vote Standard for Election of Directors

     64  
        

Vote Required; Effect of Abstentions and Broker Non-Votes

     65  
        

Vote Confidentiality

     65  
        

Where to Find More Proxy Voting Information

     66  
        

Where to Find our Corporate Governance Documents

     66  
        

Proposals by Shareholders for 2020 Annual Meeting

     66  
                      

Other Business

 

    

 

67

 

 

 

Annex A — Reconciliation of GAAP to Non-GAAP Financial Measures

 

    

 

68

 

 

 

 


 

2019 PROXY STATEMENT  iii


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Proxy Summary

This summary highlights information contained elsewhere in this Proxy Statement. This summary does not contain all information you should consider. Please read this entire Proxy Statement carefully before voting.

 

   

    Annual Shareholders Meeting    

 

   
     

Date: December 4, 2019

 

Time: 8:00 a.m. Pacific Time

 

Meeting Agenda:

The meeting will cover the proposals listed under voting matters and vote recommendations below, and any other business that may properly come before the meeting.

 

 

Place: www.virtualshareholdermeeting.com/MSFT19

 

 

Record Date: October 8, 2019

 

Mailing Date:

This Proxy Statement was first mailed to shareholders on or about October 22, 2019.

 

 

Voting:

Shareholders as of the record date are entitled to vote. Each share of common stock of Microsoft Corporation (“Company”) is entitled to one vote for each director nominee and one vote for each of the proposals.

 

Voting Matters and Vote Recommendations

See Part 4 – Proposals to be Voted on During the Meeting for more information.

 

     

Board

Recommends

 

  

See

 Page 

 

 
Management Proposals     

 

    

 

 

 

 

 

Election of 13 Directors

 

  

LOGO

 

FOR

 

    

 

55  

 

 

 

Advisory Vote to Approve Named Executive Officer Compensation

(“say-on-pay vote”)

 

  

LOGO

 

FOR

 

    

 

56  

 

 

 

Ratification of the Selection of Deloitte & Touche LLP as Our Independent

Auditor for Fiscal Year 2020

 

  

LOGO

 

FOR

 

    

 

57  

 

 

 

Shareholder Proposals     

 

    

 

 

 

 

 

Report on Employee Representation on Board of Directors

 

  

LOGO

 

AGAINST

 

    

 

57  

 

 

 

Report on Gender Pay Gap

 

  

LOGO

 

AGAINST

 

    

 

60  

 

 

 

 

   

 

    Vote in Advance of the Meeting    

 

              

 

    Vote Online During the Meeting    

 

    
                 
   

LOGO

 

Vote your shares at www.proxyvote.com.

Have your Notice of Internet Availability or proxy card for the 16-digit control number needed to vote.

 

            

 

LOGO

 

See page 63 in Part 5 –

Information About the Meeting

for details on voting your shares during the meeting through proxyvote.com.

 

 

    
   

LOGO

 

Call toll-free number 1-800-690-6903.

 

                   
   

 

LOGO

 

Sign, date, and return the enclosed proxy card or voting instruction form.

 

                         


 

2019 PROXY STATEMENT  1


Table of Contents

 


Our Director Nominees

See Part 1 – Governance and our Board of Directors for more information.

The following table provides summary information about each of the 13 director nominees. Each director is elected annually by a majority of votes cast. Charles Noski and Helmut Panke are not seeking re-election and their Board service will end on the date of the Annual Meeting. Mr. Noski currently serves as Chair of the Audit Committee and a member of the Governance and Nominating Committee. Mr. Panke currently serves as Chair of the Regulatory and Public Policy Committee and as a member of the Audit Committee. Committee assignments effective immediately following the Annual Meeting are described below. The Board has nominated Emma Walmsley for election as director. If elected, her term will begin on December 4, 2019. The Board has approved a decrease in its size from 14 members to 13 members effective as of December 4, 2019.

 

Name

Occupation

  Age  

Director

Since

  Independent  

 Other Public 

Boards

  Committee Memberships*
  AC     CC     GN       RPP 

William H. Gates III

Co-Chair and Trustee,

Bill & Melinda Gates Foundation

  63   1981   No   1                    

Reid G. Hoffman

Partner, Greylock Partners

  52   2017   Yes   0                    

Hugh F. Johnston

Vice Chairman and CFO, PepsiCo, Inc.

  58   2017   Yes   0  

LOGO

               

Teri L. List-Stoll

Executive Vice President and CFO, The Gap, Inc.

  56   2014   Yes   1  

LOGO

     

 

LOGO

 

   

Satya Nadella

CEO, Microsoft Corporation

  52   2014   No   1                    

Sandra E. Peterson

Operating Partner, Clayton, Dubilier & Rice, LLC

  60   2015   Yes   0      

LOGO

         

LOGO

Penny S. Pritzker

Chairman, PSP Partners, L.L.C.

  60   2017   Yes   0                  

LOGO

Charles W. Scharf**

Former Chairman and CEO, The Bank of New York Mellon Corporation

  54   2014   Yes   0      

LOGO

 

 

LOGO

 

   

Arne M. Sorenson

President and CEO, Marriott International, Inc.

  61   2017   Yes   1  

LOGO

               

John W. Stanton

Chairman, Trilogy Partnerships

  64   2014   Yes   2      

LOGO

         

LOGO

John W. Thompson

Independent Chair, Microsoft Corporation;

Former CEO, Virtual Instruments Corporation

  70   2012   Yes   1          

 

LOGO

 

 

LOGO

Emma N. Walmsley***

CEO and Director, GlaxoSmithKline plc

  50   New

Nominee

  Yes   1    

 

   

 

   

 

 

 

 

 

   

 

Padmasree Warrior

Founder, President, and CEO, Fable Group, Inc.

  58   2015   Yes   1      

LOGO

           

 

AC: Audit Committee

CC: Compensation Committee

GN: Governance and Nominating Committee

RPP: Regulatory and Public Policy Committee

 

 

LOGO   Chair

 
 

 

LOGO   Member

 
 

 

LOGO   Financial Expert

 

 

*

Effective December 1, 2019, changes to the committee chairs will be: Audit Committee, Hugh F. Johnston; Compensation Committee, Sandra E. Peterson; Regulatory and Public Policy Committee, Penny S. Pritzker. If nominees are elected by shareholders, committee composition immediately following the Annual Meeting will be:

 

   

Audit Committee: Hugh F. Johnston (chair); committee members include Teri L. List-Stoll, Arne M. Sorenson, and John W. Stanton.

 

   

Compensation Committee: Sandra E. Peterson (chair); committee members include Charles W. Scharf and Padmasree Warrior.

 

   

Governance and Nominating Committee: John W. Thompson (chair); committee members include Teri L. List-Stoll, Sandra E. Peterson, and Charles W. Scharf.

 

   

Regulatory and Public Policy Committee: Penny S. Pritzker (chair); committee members include John W. Stanton and John W. Thompson.

 

**

Wells Fargo & Company has announced that effective October 21, 2019, Charles W. Scharf will become its President, CEO, and a member of the Board of Directors.

 

***

The Board will consider committee appointments for Emma N. Walmsley if she is elected to the Board.



 

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Executive Compensation Advisory Vote

Our Board recommends that shareholders vote to approve, on an advisory basis, the compensation paid to the Company’s named executive officers (“Named Executives”) as described in this Proxy Statement (“say-on-pay vote”), for the reasons below. We received 96% say-on-pay vote support at our 2018 Annual Meeting. Our Compensation Committee believes the vote indicates support for our program.

 

   

    Pay for Performance    

 

   
     
    We have executed on our pay for performance philosophy.    
   

 

•  55% of the annual target compensation opportunity for our Named Executives was performance-based (on average).

 

•  50% of the annual cash incentive is determined based on pre-established financial targets, and the other 50% is determined qualitatively based on performance in three weighted performance categories.

 

•  The metrics for our performance stock awards are reviewed annually to ensure they reflect key business developments that drive long-term growth.

 

 

•  Our performance stock awards include a relative total shareholder return (“TSR”) multiplier to reward significant positive outperformance and align executives’ and shareholders’ long-term interests.

 

•  At least 70% of target compensation for our Named Executives was equity-based, providing incentives to drive long-term business success and direct alignment with returns to shareholders.

   
   

 

See Part 2 – Named Executive Officer Compensation for more information.

   
 

 

   

    Sound Program Design    

 

   
     

We design our executive officer compensation programs to attract, motivate, and retain the key executives who drive our success and industry leadership, while considering individual and Company performance and alignment with the long-term interests of our shareholders. We achieve our objectives through compensation that:

 

• Provides a competitive total pay opportunity.

 

• Delivers a majority of pay based on performance.

 

• Consists primarily of stock-based compensation.

 

• Enhances long-term focus through multi-year vesting of stock awards.

 

• Does not encourage unnecessary and excessive risk taking.

 

 

   

    Best Practices in Executive Compensation    

 

   
     

Our leading practices include:

 

• No excessive perquisites (no executive-only club memberships or medical benefits) or tax gross-ups.

 

• No employment contracts or change in control benefits.

 

• A strong clawback policy.

 

• A robust executive stock ownership policy.

 

• A policy prohibiting pledging and hedging ownership of Microsoft stock.

 

• No executive-only retirement programs.

 


 

2019 PROXY STATEMENT  3


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Business Overview

Our Business Performance

In fiscal year 2019, we continued to achieve strong business results, focusing on enabling the success and earning the trust of our customers. We expanded our offerings and accelerated innovation to capture the opportunities that the era of intelligent cloud and intelligent edge is creating for our customers. We continue to improve our position as a trusted partner to our customers, accelerating their digital transformations through our key cloud, productivity tools, and artificial intelligence assets.

Fiscal Year 2019 Achievements

 

 

Revenue exceeded $125 billion.

 

 

Commercial cloud revenue grew 43% to $38.1 billion.

 

 

Server products and cloud services revenue grew 25%.

 

 

Azure revenue grew 72%.

 

 

Windows Commercial products and cloud services revenue grew 14%.

 

 

Gaming revenue grew 10% to $11.4 billion.

 

 

Surface revenue grew 23% to $5.7 billion.

 

 

LinkedIn revenue grew 28% to $6.8 billion.

Percentagesare year-over-year. Commercial cloud revenue includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties.

 

   

    Strong Long-Term Performance    

 

   
     

Total Shareholder Return*

through June 30, 2019

 

 

LOGO

  

 

Our total shareholder

return and total cash

returned to shareholders

for the past three years

have continued to

be strong.

  

Total Cash Returned

to Shareholders

(in billions)

 

 

LOGO

* Total shareholder return includes reinvestment of dividends.

 

Governance and Board Best Practices

Our mission to empower every person and every organization on the planet to achieve more is ambitious, and we cannot fulfill it with a narrow or short-term focus. Our adoption of leading governance practices fosters our sustained business success over the long term. Strong corporate governance, informed by participation from our shareholders, is essential to achieving our mission. During fiscal year 2019, independent members of our Board and members of management conducted outreach to a cross-section of shareholders owning over 49% of our shares and provided shareholder feedback to the Board.



 

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Our Board believes that having a diverse mix of directors with complementary qualifications, expertise, and attributes is essential to meeting its oversight responsibility. Of our 13 Board nominees, 11 are independent. Having an independent board is a core element of our governance philosophy.

 

   

    Our Director Nominees    

 

   
     
   
               LOGO   LOGO                     

 

LOGO                     

 

 

   

    Independent, Effective Board Oversight    

 

   
     
   

•  Independent Board Chair.

 

•  11 of 13 director nominees are independent.

 

•  All committee members are independent.

 

•  Board-adopted refreshment commitment to maintain an average tenure of 10 years or less for its independent directors as a group.

 

•  Executive sessions provided for all in-person Board and committee meetings.

 

•  Annual Board and committee evaluations.

 

•  Director orientation and continuing education programs for directors.

 

•  All current Audit Committee members are audit committee financial experts under the Securities and Exchange Commission (“SEC”) rules.

 

•  Independent compensation consultant.

   
 

 

   

    Shareholder Rights    

 

   
     

•  Single class of stock with equal voting rights.

 

•  All directors are elected annually.

 

•  Directors are elected by majority vote in uncontested elections.

 

•  Confidential voting policy.

 

•  15% of outstanding shares can call a special meeting.

 

•  Our bylaws provide for proxy access by shareholders.

 

See Part 1 – Governance and our Board of Directors for more information.



 

2019 PROXY STATEMENT  5


Table of Contents
1  

 

GOVERNANCE AND

OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            

COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        

THE MEETING

  5  

 

INFORMATION            

ABOUT THE
MEETING

 

       

 

1. Governance and Our Board of Directors

 

 

Trust and Governance

We believe that earning the trust of our customers, partners, shareholders, and other stakeholders is a foundation of our business success and is fundamental to realizing Microsoft’s mission to empower every person and every organization on the planet to achieve more.

Our focus on earning trust positions us well as technology companies face new scrutiny and demands for accountability. The technology sector faces greater expectations than ever from governments and other stakeholders to address the impacts of technology on individual rights, cybersecurity, and environmental sustainability. Customers embrace technology they understand and trust, and we expect they will increasingly turn away from products and companies that fail to uphold that trust. Governments and investors are increasingly focused on the importance of the effective engagement and action on environmental, social, and governance (“ESG”) topics.

To meet the expectations of our stakeholders and to earn and maintain their trust, we are committed to conducting our business in ways that are principled, transparent, and accountable. The foundation of these commitments is expressed in Microsoft’s Standards of Business Conduct (“Standards”) at https://www.microsoft.com/en-us/legal/compliance/sbc/ which apply to our employees, officers, Board of Directors, and our subsidiaries and controlled affiliates across the globe. These Standards require not only legal compliance, but also broader commitments to address accessibility, diversity and inclusion, human rights, and privacy. In support of these Standards, we strive to build a workplace culture that embraces learning and fosters trust—a culture where every employee feels free to ask questions and raise concerns when something doesn’t seem right. We extend our high expectations to suppliers who do business with Microsoft, requiring them to uphold the human rights, labor, health and safety, environmental, and business ethics practices prescribed in our Supplier Code of Conduct at http://aka.ms/scoc.

In addition, we have made a broad range of commitments on issues of significant concern to the public, including privacy, security, and environmental sustainability. We believe privacy is a fundamental human right and demonstrate our belief with concrete actions to protect our customer’s privacy and give them control over their data. We take a broad view of cybersecurity and work to protect our customers and the wider community through our own security operations, the security products and services we offer, and our investments in technology, industry, and policy partnerships. As part of our commitment to environmental sustainability, we’ve achieved carbon neutrality for our global operations every year since 2012. In 2019, we also set our next milestone on the path to powering our datacenters with 100% renewable energy, aiming to surpass a 70% target by 2023.

We also aim to hold ourselves accountable by publicly reporting on our policies, practices, and performance to provide our stakeholders visibility into how we are meeting our commitments and responsibilities. Our Reports Hub available at www.microsoft.com/transparency provides a consolidated, comprehensive view of our ESG reporting and data ranging from our carbon footprint to workforce demographics to political donations. We work to align our ESG reporting to global standards such as the Global Reporting Initiative Sustainability Reporting Standards. In addition, we were among the first companies to align our human rights work with the United Nations Guiding Principles on Business and Human Rights and to adopt the United Nations Guiding Principles Reporting Framework.

Our commitment to strong corporate governance and effective board oversight plays a critical role in ensuring accountability and earning trust. Below we describe Microsoft’s corporate governance policies and practices that foster effective Board oversight in service of the long-term interests of our shareholders, explain the process for selecting director candidates, and present the 2019 nominees for election to our Board.

 

 

Board of Directors Oversight Roles

Shareholders elect our Board to serve their long-term interests and to oversee management. Our Board and its committees work closely with management to provide oversight, review, and counsel related to long-term strategy, risks and opportunities, and feedback from shareholders. In particular, the Board oversees business affairs and integrity, works with management to determine our mission and long-term strategy, oversees risk management, performs the annual CEO evaluation, oversees CEO succession planning, and oversees internal control over financial reporting and external audit. The Board looks to the expertise of its

 


 

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1  

 

GOVERNANCE AND

OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            

COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        

THE MEETING

  5  

 

INFORMATION            

ABOUT THE
MEETING

 

       

 

committees to provide strategic oversight in their areas of focus. Examples of oversight areas are provided below and further below we describe the Board’s committee structure and each committee’s areas of focus and oversight.

Strategy

Led by the CEO, the Senior Leadership Team (“SLT”) drives Microsoft’s strategy and operations and works to develop and execute business strategy, foster our desired culture, create innovative products, establish accountability, and control risk. The SLT also aligns our structure, operations, people, policies, and compliance efforts to our mission and strategy.

Overseeing management’s development and execution of the Company’s strategy is one of our Board’s primary responsibilities. The Board works closely with the SLT to respond to a dynamically changing business environment. The SLT and other leaders from across the Company provide business and strategy updates to our Board quarterly, and the Board participates in an annual strategy retreat with the SLT and other leaders. At meetings throughout the year, the Board also assesses the strategic alignment of the Company’s budget and capital plan and strategic acquisition and integration process. For large acquisitions such as LinkedIn and GitHub, the Board engages management on a broad range of considerations, such as due diligence findings, valuation, and integration planning.

Risk

Microsoft’s Corporate Governance Guidelines at https://aka.ms/policiesandguidelines describe our Board’s risk oversight roles. The Board and the Audit Committee assess whether management has an appropriate framework to manage risks and whether that framework is operating effectively. On a regular basis, the Board and its committees engage with management on risk as part of broad strategic and operational discussions which encompass interrelated risks, as well as on a risk-by-risk basis. The Board executes its oversight responsibility directly and through its committees, who regularly report back to the Board. For information on specific areas of risk oversight, each committee has a charter describing its specific responsibilities which can be found on our website at https://aka.ms/boardcommittees. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees. We believe that the Board’s leadership structure, including its independent chair, supermajority of independent directors, and allocation of oversight responsibilities to appropriate committees, provides effective board-level risk oversight.

Culture, Workplace, and Succession Planning

We focus on creating a respectful, rewarding, diverse, and inclusive work environment that allows our employees to build meaningful careers. Key to this environment is cultivating a growth mindset, where our workforce is focused on learning, listening, and growing. We have established a set of five “People Priorities” that ground our Human Resource strategy: talent that can change the world, an evolving culture with a growth mindset, an exceptional place to work, transformational leadership, and empowering at scale. Each SLT member serves as a “sponsor” for one or more of the priorities and all are accountable to help achieve them. We consider employee input from our annual anonymous poll and other feedback channels in designing talent programs, rewards, and benefits, and building the overall employee experience.

The Board, the Compensation Committee, and the Regulatory and Public Policy Committee engage with the SLT and Human Resources executives across a broad range of human capital management topics including culture, succession planning and development, compensation, benefits, employee recruiting and retention, and diversity and inclusion. Additionally, each year the Compensation and Audit Committees evaluate management’s annual assessment of risk related to our compensation policies and practices. The Compensation Committee also oversees our sales incentive programs through engagement with management’s Sales Incentive Compensation Governance Committee. The Board and the Compensation Committee work with the CEO and our head of Human Resources to review CEO and senior executive succession plans, considering the qualifications and experience of potential leadership candidates.

 

 

Our Governance Structure

Framework

We have developed a corporate governance framework designed to ensure our Board has the authority and practices in place to review and evaluate our business operations and to make decisions independent of management. Our goal is to align the interests of directors, management, and shareholders, and comply with or exceed the requirements of the NASDAQ Stock Market, LLC (“NASDAQ”) and applicable laws and regulations. This framework establishes the practices our Board follows with respect to, among other things, Board composition and member selection, Board meetings and involvement of senior management, director

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

compensation, CEO performance evaluation, management succession planning, and Board committees. The Board is committed to seeking opportunities for improvements on an ongoing basis. Each spring, the Board updates our corporate governance framework based on shareholder feedback, results from the annual shareholders meeting, the Board and committees’ self-assessments, governance best practices, and regulatory developments.

 

   

    Our Corporate Governance Documents    

 

   
     

• Amended and Restated Articles of Incorporation

• Bylaws

• Corporate Governance Guidelines

• Director Independence Guidelines

• Microsoft Finance Code of Professional Conduct

• Microsoft Standards of Business Conduct

• Audit Committee Charter and Responsibilities Calendar

 

 

• Compensation Committee Charter

• Governance and Nominating Committee Charter

• Regulatory and Public Policy Committee Charter

• Executive Stock Ownership Policy

• Executive Compensation Recovery Policy

• Compensation Consultant Independence Standards

These documents are available on our website at https://aka.ms/policiesandguidelines.

Shareholder Rights

Microsoft strives to implement best practices in shareholder rights and to ensure the Company and Board align with the long-term interests of shareholders. We have enhanced our corporate governance framework over time based on input from our Board, shareholders, and other governance experts. Shareholder rights provided include:

 

 

Single class of shares with each share entitled to one vote.

 

 

Annual election of all directors (unclassified board).

 

 

Majority voting standard for directors in uncontested elections.

 

 

Confidential voting policy.

 

 

Shareholders of 15% of outstanding shares have the right to call a special meeting.

 

 

Proxy access bylaw allows groups of up to 20 shareholders holding 3% of shares for at least three years to nominate up to two individuals or 20% of the Board (whichever is greater) for inclusion in the proxy statement and ballot for election at an annual shareholders meeting.

Other requirements that align Company and long-term interests of shareholders include:

 

 

Significant stock ownership requirements for directors, executive officers, and other senior leaders.

 

 

Strong ‘no-fault’ executive compensation recovery (“clawback”) policy that applies to executive officers, other senior leaders, and our chief accounting officer.

 

 

Strict hedging and pledging prohibitions against our directors and executive officers hedging their ownership of Microsoft stock, including by trading in options, puts, calls, or other derivative instruments related to Company stock or debt. Directors and executive officers are prohibited from purchasing Microsoft stock on margin, borrowing against Microsoft stock held in a margin account, or pledging Microsoft stock as collateral for a loan.

 

 

Board tenure policy that seeks to maintain an average tenure of 10 years or less for the Board’s independent directors.

Shareholder Engagement

Effective corporate governance includes regular constructive conversations with our shareholders to proactively seek shareholder insights and to answer shareholder inquiries.

We maintain an active dialogue with shareholders to ensure a diversity of perspectives is thoughtfully considered on issues including strategy, business performance, risk, culture and workplace topics, compensation practices, and a broad range of ESG issues. Our Office of the Corporate Secretary coordinates engagement with Investor Relations and provides a summary of all relevant feedback to our Board. In fiscal year 2019, our Board Chair and members of management engaged with a cross-section of shareholders owning over 49% of Microsoft shares. In addition, throughout the year our Investor Relations group engages with our

 


 

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      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

shareholders, frequently along with Mr. Nadella, our CEO, or Ms. Hood, our CFO. As noted above, each spring the Board updates our corporate governance framework based on a number of inputs including shareholder feedback.

To communicate broadly with our shareholders, we also seek to transparently share ESG information relevant to our shareholders through our Investor Relations website, our Annual Report, this Proxy Statement, our Reports Hub, and in posts about Microsoft On the Issues blog.

We are proud to have helped pioneer a director video series that gives shareholders and other stakeholders insight into the thinking of our Board members. We recently released a new installment featuring an interview with Hugh Johnston. The videos provide an opportunity for our directors to discuss how they approach their role and responsibilities and to provide a behind-the-scenes look into the boardroom. The series can be viewed on our website at https://aka.ms/DirectorVideoSeries.

Annual Board and Committee Evaluation Process

The Board is committed to a rigorous self-evaluation process. The Governance and Nominating Committee annually evaluates the performance of the Board. The evaluation includes feedback from each director, and the results are reported to and discussed with the Board. The report includes an assessment of the Board’s compliance with the principles in the Corporate Governance Guidelines and identifies areas in which the Board could enhance its performance.

In addition, each committee annually evaluates its performance and reports the results to the Board. For each committee, the evaluation includes feedback from directors, as well as key members of management and consultants who regularly attend the meetings. Each committee’s report includes an assessment of the committee’s compliance with the principles in the Corporate Governance Guidelines and its charter and identifies areas in which the committee could enhance its performance. Results requiring additional review or consideration are discussed at subsequent Board and committee meetings.

Director Attendance

Each quarter, our Board holds two-day in-person meetings. Committee meetings occur the first day before the Board meeting. Once a year, committee and Board meetings occur on the same day so that the evening and following day can be devoted to the Board’s annual strategy retreat, which includes presentations and discussions with our SLT and other senior management about our long-term strategy. In addition to the quarterly meetings, typically there are other regularly scheduled Board and committee meetings and several special meetings each year. At each quarterly Board meeting, time is set aside for the independent directors to meet without management present. Our Board met five times during fiscal year 2019.

Each director nominee who is a current director attended at least 75% of the aggregate of all fiscal year 2019 meetings of the Board and each committee on which he or she served.

Directors are expected to attend the annual shareholders meeting, if practicable. All directors attended the 2018 Annual Meeting.

Director Orientation and Continuing Education

Our orientation program familiarizes new directors with our businesses, strategies, and policies and assists new directors in developing Company and industry knowledge to optimize their service on the Board. Regular continuing education programs enhance the skills and knowledge directors use to perform their responsibilities. These programs may include internally developed programs, programs presented by third parties, or financial and administrative support to attend qualifying academic or other independent programs.

Director Stock Ownership Policy

To align the interests of our directors and shareholders, our directors are required to own Microsoft shares equal in value to at least three times the base annual retainer (cash and stock) payable to a director. Each director must retain 50% of all net shares (post-tax) from the retainer until reaching the minimum share ownership requirement. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts toward the minimum ownership requirement. Each of our directors complied with our stock ownership policy in fiscal year 2019.

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

Derivatives Trading, Hedging, and Pledging

Our directors and executive officers are prohibited from trading in options, puts, calls, or other derivative instruments related to Microsoft equity or debt securities. They also are prohibited from purchasing Microsoft common stock on margin, borrowing against Microsoft common stock held in a margin account, or pledging Microsoft common stock as collateral for a loan. Employees, other than executive officers, are generally permitted to engage in transactions designed to hedge or offset market risk.

Board Independence

Having an independent board is a core element of our governance philosophy. The Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. The independent members of the Board annually appoint an independent Board Chair to facilitate the Board’s oversight of management, promote communication between management and our Board, engage with shareholders, and lead consideration of key governance matters.

 

   

    Key Elements of Board Independence at Microsoft    

 

   
     

•  11 of 13 director nominees are independent – We are committed to maintaining a substantial majority of directors who are independent of the Company and management. Except for our CEO, Satya Nadella, and our co-founder, Bill Gates, all director nominees are independent.

 

•  Board tenure – We are committed to board refreshment. To strike a balance between retaining directors with deep knowledge of the Company and adding directors with a fresh perspective, the Board will seek to maintain an average tenure of 10 years or less for its independent directors as a group.

 

•  Executive sessions of independent directors – At each quarterly Board meeting, time is set aside for the independent directors to meet in executive session without management present. Additional executive sessions are held as needed.

 

•  Committee independence – Only independent directors are members of the Board’s committees. Each committee meets regularly in executive session.

 

•  Independent compensation consultant – The compensation consultant retained by the Compensation Committee is independent of the Company and management as required by the Compensation Consultant Independence Standards.

 

•  Independent Board Chair – John Thompson currently serves as independent Chair of the Board. Key responsibilities include:

 

• Calling meetings of the Board and independent directors.

 

• Setting the agenda for Board meetings in consultation with other directors, the CEO, and the Corporate Secretary.

 

• Chairing executive sessions and coordinating activities of the independent directors.

 

• Leading the Board’s annual CEO performance evaluation.

 

• When requested, representing the Board with internal and external audiences including shareholders.

 

Board Committees

To support effective corporate governance, our Board delegates certain responsibilities to its committees, who report on their activities to the Board. These committees have the authority to engage legal counsel or other advisors or consultants as they deem appropriate to carry out their responsibilities. Our Board has an Audit Committee, Compensation Committee, Governance and Nominating Committee, and Regulatory and Public Policy Committee. In addition, our Regulatory and Public Policy Committee holds joint meetings with both the Audit Committee and the Compensation Committee on areas of complementary responsibility.

The table below provides summary information about each director nominee followed by a summary of each committee’s responsibilities. Each committee has a charter describing its specific responsibilities which can be found on our website at https://aka.ms/boardcommittees.

 


 

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OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

Membership

 

Director

   Audit         Compensation      
    Governance and
Nominating

 
   
     Regulatory and
Public Policy
 
 

 

William H. Gates III

                            

 

Reid G. Hoffman

                            

 

Hugh F. Johnston

   LOGO                        

 

Teri L. List-Stoll

   LOGO             LOGO          

 

Satya Nadella

                               

 

Charles H. Noski*

  

 

LOGO   LOGO

            LOGO          

 

Helmut Panke*

   LOGO                     LOGO  

 

Sandra E. Peterson

         LOGO               LOGO  

 

Penny S. Pritzker

                         LOGO  

 

Charles W. Scharf

         LOGO       LOGO          

 

Arne M. Sorenson

   LOGO                        

 

John W. Stanton

         LOGO               LOGO  

 

John W. Thompson

                 LOGO       LOGO  

 

Padmasree Warrior

         LOGO                  

 

Number of meetings in fiscal year 2019

   9     5       4       3  

* Charles Noski and Helmut Panke will not seek  re-election at the 2019 Annual Meeting.

  LOGO   Chair             LOGO   Member             LOGO   Financial Expert 

Effective December 1, 2019, changes to the committee chairs will be: Audit Committee, Hugh F. Johnston; Compensation Committee, Sandra E. Peterson; Regulatory and Public Policy Committee, Penny S. Pritzker.

If nominees are elected by shareholders, committee composition immediately following the Annual Meeting will be: (i) Audit Committee: Hugh F. Johnston (chair), Teri L. List-Stoll, Arne M. Sorenson, and John W. Stanton; (ii) Compensation Committee: Sandra E. Peterson (chair); Charles W. Scharf, and Padmasree Warrior; (iii) Governance and Nominating Committee: John W. Thompson (chair); Teri L. List-Stoll, Sandra E. Peterson, and Charles W. Scharf; and (iv) Regulatory and Public Policy Committee: Penny S. Pritzker (chair); John W. Stanton, and John W. Thompson. Emma N. Walmsley is nominated for election to the Board at the Annual Meeting. The Board will consider committee appointments for Ms. Walmsley if she is elected to the Board.

 

   

    Audit    

 

   
     

•  Oversee the work of our accounting function and internal control over financial reporting.

 

•  Oversee internal auditing processes.

 

•  Inquire about significant risks, review our policies for enterprise risk assessment and risk management, and assess the steps management has taken to control these risks.

 

•  Review with management policies, practices, compliance, and risks relating to our investment portfolio.

 

•  With the Regulatory and Public Policy Committee, review risks relevant to the Company’s information system architecture and controls and cybersecurity. The chairs of these committees, in consultation with the Board Chair, may determine that this should be undertaken by the full Board in place of a joint meeting of the committees.

 

•  Review compliance with significant applicable legal, ethical, and regulatory requirements, including those relating to regulatory matters that may have a material impact on our consolidated financial statements or internal control over financial reporting.

 

The Audit Committee is responsible for the compensation, retention, and oversight of the independent auditor engaged to issue audit reports on our consolidated financial statements and internal control over financial reporting. The Audit Committee relies on the expertise and knowledge of management, the internal auditor, and the independent auditor in carrying out its oversight responsibilities.

 

The Board has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. All current members of the Audit Committee meet the NASDAQ listing standard of financial sophistication and are “audit committee financial experts” under SEC rules.

 

 


 

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OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

   

    Compensation    

 

   
     

•  Assist our Board in establishing the annual goals and objectives of the CEO.

 

•  Establish the process for annually reviewing the CEO’s performance.

 

•  Recommend our CEO’s compensation to the independent members of our Board for approval.

 

•  Approve annual compensation, and in consultation with the CEO oversee performance evaluations, for the non-CEO members of the SLT.

 

•  Review and discuss with the CEO and report to the Board development and corporate succession plans for the non-CEO members of the SLT.

 

•  Oversee administration of the Company’s equity-based compensation and retirement plans.

 

•  Monitor and evaluate the compensation and benefits structure of Microsoft, as the committee deems appropriate, including policies regarding SLT compensation.

 

•  Oversee and advise the Board and management about Company policies, programs, and initiatives for diversity and inclusion, and annually meet with the Regulatory and Public Policy Committee on these matters and human capital management.

 

•  Periodically review the compensation paid to non-employee directors and make recommendations to our Board for any adjustments.

 

Our senior executives for Human Resources support the Compensation Committee in its work. The Committee may delegate its authority to subcommittees and to one or more designated members of the Committee. The Committee may delegate to one or more executive officers the authority to make grants of equity-based compensation to eligible individuals who are not executive officers and to administer the Company’s equity-based compensation plans. The Committee has delegated to senior management the authority to make stock award grants to employees who are not members of the SLT or Section 16 officers and to administer the Company’s equity-based compensation plans.

 

Independent compensation consultant – The Compensation Committee retains Semler Brossy Consulting Group, LLC (“Semler Brossy”) to advise the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. Semler Brossy also evaluates compensation for non-employee directors, the next levels of senior management, and equity compensation programs generally. Semler Brossy consults with the Committee about its recommendations to the Board on CEO compensation. Semler Brossy is directly accountable to the Committee. To maintain the independence of the firm’s advice, Semler Brossy does not provide any services for Microsoft other than those described above. The Committee has adopted Compensation Consultant Independence Standards, which can be viewed on our website at https://aka.ms/policiesandguidelines. These standards require that the Committee annually assess the independence of its compensation consultant. A consultant satisfying the following requirements will be considered independent. The consultant (including each individual employee of the consultant providing services):

 

•  Is retained and terminated by, has its compensation fixed by, and reports solely to, the Compensation Committee.

 

•  Is independent of the Company.

 

•  Will not perform any work for Company management except at the request of the Compensation Committee chair and in the capacity of the Committee’s agent.

 

•  Should not provide any unrelated services or products to the Company and its affiliates or management, except for surveys purchased from the consultant’s firm.

 

In assessing the consultant’s independence, the Compensation Committee considers the nature and amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the fees paid for those services in relation to the firm’s total revenues. The consultant annually prepares for the Committee an independence letter providing assurances and confirmation of the consultant’s independent status under the standards. The Committee believes that Semler Brossy has been independent during its service for the Committee.

 

 


 

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NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

 

    Governance and Nominating    

 

 
     

• Determine and recommend the slate of director nominees for election to our Board during the annual meeting.

 

• Identify, recruit, and recommend candidates for the Board.

 

• Review and make recommendations to the Board about the composition of Board committees.

 

• Annually evaluate the performance and effectiveness of the Board.

 

• Annually assess the independence of each director.

 

• Monitor adherence to, review, develop, and recommend changes to our corporate governance framework.

 

• Review and provide guidance to the Board and management about the framework for the Board’s oversight of, and involvement in, shareholder engagement.

 

• Annually review the charters of Board committees and, after consultation with the respective committees, make recommendations, if necessary, about changes to the charters.

 

 

  Regulatory and Public Policy

 

 
     

• Review and advise the Board and management about legal, regulatory, and compliance matters concerning competition and antitrust, privacy, workforce, and immigration laws and regulations.

 

• With the Audit Committee, review risks relevant to our information system architecture and controls and cybersecurity. The chairs of these committees, in consultation with the Board Chair, may determine that this should be undertaken by the full Board in place of a joint meeting of the committees.

 

• With the Compensation Committee, review policies, programs, and initiatives for human capital management and diversity and inclusion.

 

• Review our policies and programs that relate to matters of corporate social responsibility, including accessibility, environmental sustainability, ethical business practices, human rights, philanthropy, privacy and cybersecurity, and responsible sourcing.

 

• Review our government relations activity and political activities and expenditures.

 

• Review our public policy agenda and position on significant public policy matters.

 

Recognizing the interest of shareholders in establishing greater transparency about corporate political contributions, we disclose our political contributions to support candidates and ballot measures and how certain of our trade association membership dues are used for political activities. As part of our commitment to transparency, we developed the Principles and Policies for Guiding Microsoft’s Participation in the Public Policy Process in the United States, which focuses on ensuring compliance with applicable federal and state laws and goes beyond compliance to implement what we consider leading practices in corporate accountability, transparency, integrity, and responsibility. The policy is available at www.microsoft.com/en-us/public-policy-engagement.

 

 


 

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GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

 

Director Selection and Qualifications

Shareholders elect our Board of Directors annually. In making its annual director nominations determination, the Board’s objective is to recommend a group of directors that can best ensure the continuing success of our business and represent shareholder interests through the exercise of sound judgment using its diversity of experience and perspectives.

The Governance and Nominating Committee recommends to the Board director candidates for nomination and election during the annual shareholders meeting or for appointment to fill vacancies. The Committee works with our Board to determine the characteristics, skills, and experience for the Board as a whole and its individual members with the objective of having a board with diverse backgrounds, skills, and experience. In making its recommendations to our Board, the Committee considers the qualifications of individual director candidates applying the Board membership criteria described below. The Committee retains any search firm involved in identifying potential candidates and approves their fees.

For all directors, we require independence, integrity, personal and professional ethics, business judgment, and the ability and willingness to commit sufficient time to the Board. Our Board considers many factors in evaluating the suitability of individual director candidates, including their general understanding of global business, sales and marketing, finance, and other disciplines relevant to the success of a large, publicly traded company; understanding of our business and technology; educational and professional background; personal accomplishment; and national, gender, age, and ethnic diversity. The Board is committed to actively seeking highly qualified women and individuals from minority groups to include in the pool from which new candidates are selected. We work with our search firm to ensure the candidate slate provided to the Committee includes diverse candidates.

The Board does not believe that directors should expect to be re-nominated annually. In determining whether to recommend a director for re-election, the Committee considers the director’s participation in and contributions to the activities of the Board, the results of the most recent Board evaluation, and meeting attendance.

When the Committee recruits new director candidates, that process typically involves either a search firm or a member of the Committee contacting a prospect to assess interest and availability. A candidate will then meet with members of the Board and Mr. Nadella, and then meet with members of management as appropriate. At the same time, the Committee and the search firm will contact references for the candidate. A background check is completed before a final candidate recommendation is made to the Board.

Shareholders previously elected all Board nominees, except Ms. Walmsley. In recruiting Ms. Walmsley, the Committee retained the search firm Egon Zehnder to help identify director prospects, perform candidate outreach, assist in reference checks, and provide other related services.

The Committee assesses its efforts to maintain an effective and diverse board as part of its regular responsibilities, which include annually:

 

 

Reporting to our Board on the performance and effectiveness of the Board.

 

 

Presenting to our Board individuals recommended for election to the Board during the annual meeting.

 

 

Assessing the Committee’s own performance.

Shareholder Recommendations and Nominations of Director Candidates

Recommendations

The Governance and Nominating Committee considers shareholder recommendations for candidates for the Board of Directors using the same criteria described above. The name of any recommended candidate for director, together with a brief biographical sketch, a document indicating the candidate’s willingness to serve if elected, and evidence of the nominating shareholder’s ownership of Company stock must be sent to the attention of MSC 123/9999, Office of the Corporate Secretary, Microsoft Corporation, One Microsoft Way, Redmond, WA, 98052-6399.

Nominations

Our Bylaws provide for proxy access shareholder nominations of director candidates by eligible shareholders. A shareholder who wishes to formally nominate a candidate must follow the procedures described in Article 1 of our Bylaws. Proxy access candidates will be included in the Company’s proxy statement and ballot.

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

 

Board Composition

Our Board of Directors believes that having a diverse mix of directors with complementary qualifications, expertise, and attributes is essential to meeting its oversight responsibility.

 

   

    Director Nominee Qualifications, Expertise, and Attributes    

 

   
     
 
   

    

 

       

 

 

LOGO

 

 

LOGO

 

 

LOGO

 

 

LOGO

 

 

LOGO     

 

Board Diversity

Representation of gender, ethnic, geographic, cultural, or other perspectives that expand the Board’s understanding of the needs and viewpoints of our customers, partners, employees, governments, and other stakeholders worldwide.

 

     
 

 

7

 

                   
    

 

 

LOGO     

 

Financial

Leadership of a financial firm or management of the finance function of an enterprise, resulting in proficiency in complex financial management, capital allocation, and financial reporting processes.

 

     
 

 

7

 

                   
    

 

 

LOGO     

 

 

Global Business

Experience driving business success in markets around the world, with an understanding of diverse business environments, economic conditions, cultures, and regulatory frameworks, and a broad perspective on global market opportunities.

 

     
 

 

12

 

         
    

 

 

LOGO     

 

 

Leadership

Extended leadership experience for a significant enterprise, resulting in a practical understanding of organizations, processes, strategic planning, and risk management. Demonstrated strengths in developing talent, planning succession, and driving change and long-term growth.

 

     
 

 

13

 

       
    

 

 

LOGO     

 

 

Mergers and Acquisitions

A history of leading growth through acquisitions and other business combinations, with the ability to assess “build or buy” decisions, analyze the fit of a target with a company’s strategy and culture, accurately value transactions, and evaluate operational integration plans.

 

     
 

 

12

 

         
    

 

 

LOGO     

 

 

Sales and Marketing

Experience developing strategies to grow sales and market share, build brand awareness and equity, and enhance enterprise reputation.

 

     
 

 

5

 

                       
    

 

 

LOGO     

 

 

Technology

A significant background working in technology, resulting in knowledge of how to anticipate technological trends, generate disruptive innovation, and extend or create new business models.

 

     
 

 

8

 

                 
                                   
                                   
                                                                   

 

 


 

2019 PROXY STATEMENT  15


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

The table below summarizes the key qualifications, skills, and attributes most relevant to the decision to nominate candidates to serve on the Board. A mark indicates a specific area of focus or expertise on which the Board particularly relies. Not having a mark does not mean the director does not possess that qualification or skill. Our director nominees’ biographies describe each director’s background and relevant experience in more detail.

 

   

    Director Skill Matrix    

 

   
     

LOGO

 

 


 

16    LOGO   


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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

 

Our Director Nominees

Following are biographies for the 13 directors nominated by the Board for election during the 2019 Annual Meeting.

 

LOGO     

William H. Gates III 

 
   
    

 

Age: 63 | Director Since: 1981 | Birthplace: United States

 

LOGO        LOGO        LOGO        LOGO

          
   

Experience:

Microsoft Corporation (1981-present)

   Technical Advisor to Satya Nadella (CEO) (2014-present)

   Co-founder and Chairman (1981-2014)

   Chief Software Architect (2000-2006)

   Chief Executive Officer (1981-2000)

  

Microsoft Committees:

•   None

 

Other Public Company Directorships:

   Berkshire Hathaway Inc.

 

Former Public Company Directorships
held in the Past Five Years:

   None

 

Other Positions:

    Co-Chair and Trustee, Bill & Melinda Gates Foundation

 

LOGO   

 

Reid G. Hoffman 

 
   
  

 

Age: 52 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO

        
   

Experience:

Greylock Partners (2009-present) (venture capital firm)

    Partner (2009-present)

Reinvent Capital (2019-present)

    Partner (2019-present)

LinkedIn Corporation (2003-2016)

    Co-founder and Chairman (2003-2016)

   Executive Chairman (2009)

   Chief Executive Officer (2003-2007 and 2008-2009)

   President, Products (2007-2008)

PayPal Inc. (2000-2002)

   Executive Vice President (2000-2002)

 

  

Microsoft Committees:

   None

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
Held in the Past Five Years:

   LinkedIn Corporation

 


 

LOGO

 


 

2019 PROXY STATEMENT  17


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

Hugh F. Johnston 

 
   
  

 

Age: 58 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

PepsiCo, Inc. (1987-1999 and 2002-present)

(food and beverage company)

   Vice Chairman (2015-present)

   Executive Vice President and Chief Financial Officer (2010-present)

   Executive Vice President, Global Operations (2009-2010)

   President, Pepsi-Cola North America (2007-2009)

   Various positions of increasing authority
(1987-1999 and 2002-2007)

Merck & Company, Inc. (1999-2002)

   Vice President, Retail Marketing, Merck-Medco Managed Care LLC (1999-2002)

 

  

 

Microsoft Committees:

   Audit

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
held in the Past Five Years:

   AOL, Inc.

   Twitter Inc.

 

LOGO   

 

Teri L. List-Stoll 

 
   
  

 

Age: 56 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

The Gap, Inc. (2016-present)

(clothing and accessories retailer)

   Executive Vice President and Chief Financial Officer (2016-present)

DICK’S Sporting Goods, Inc. (2015-2016)

   Executive Vice President and Chief Financial Officer (2015-2016)

Kraft Foods Group, Inc. (2013-2015)

   Senior Advisor (2015)

   Executive Vice President and Chief Financial Officer (2013-2015)

   Senior Vice President (2013)

Procter & Gamble Co. (1994-2013)

   Senior Vice President and Treasurer (2009-2013)

   Various positions of increasing authority (1994-2009)

 

  

Microsoft Committees:

   Audit

   Governance and Nominating

 

Other Public Company Directorships:

   Danaher Corporation

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Former Trustee, Financial Accounting Foundation

   Former Practice Fellow, Financial Accounting Standards Board

 


 

 


 

18    LOGO   


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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

Satya Nadella 

 
   
  

 

Age: 52 | Director Since: 2014 | Birthplace: India

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Microsoft Corporation (1992-present)

   Chief Executive Officer and Director (2014-present)

   Executive Vice President, Cloud and Enterprise (2013-2014)

   President, Server and Tools (2011-2013)

   Senior Vice President, Online Services Division (2009-2011)

   Senior Vice President, Search, Portal, and Advertising (2008-2009)

   Various positions of increasing authority (1992-2008)

  

 

Microsoft Committees:

•   None

 

Other Public Company Directorships:

   Starbucks Corporation

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

 

LOGO   

 

Sandra E. Peterson 

 
   
  

 

Age: 60 | Director Since: 2015 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Clayton, Dubilier & Rice, LLC (2019-present) (investment firm)

   Operating Partner (2019-present)

Johnson & Johnson (2012-2018) (medical devices, pharmaceutical and consumer goods manufacturer)

   Group Worldwide Chair and member of the Executive Committee (2012-2018)

Bayer CropScience AG (2010-2012)

   Chairman of the Board of Management (2010-2012)

   Member of Board of Management (2010)

Bayer HealthCare LLC (2005-2010)

   Executive Vice President and President, Medical Care (2009-2010)

   President, Diabetes Care Division (2005-2009)

Medco Health Solutions, Inc. (1999-2004)

   Group President of Government (2003-2004)

   Senior Vice President, Health Businesses (2001-2003)

   Senior Vice President, Marketing and Strategy
(1999-2001)

 

  

Microsoft Committees:

   Compensation

   Regulatory and Public Policy

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
Held in the Past Five Years:

   Dun & Bradstreet Corporation

 


 

LOGO

 


 

2019 PROXY STATEMENT  19


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

Penny S. Pritzker 

 
   
  

 

Age: 60 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

United States Secretary of Commerce (2013-2017)

PSP Partners, L.L.C. (present) (private investment firm)

   Founder and Chairman (present)

Pritzker Realty Group (present)

    Co-founder and Chairman (present)

Inspired Capital Partners (present)

•   Co-founder and Chairman (present)

Artemis Real Estate Partners (2009-2013)

    Co-founder and Chairman (2009-2013)

The Parking Spot (1998-2011)

   Co-founder and Chairman (1998-2011)

Vi Senior Living (1987-2011)

   Founder and Chairman (1987-2011)

 

  

Microsoft Committees:

   Regulatory and Public Policy

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Co-founder, Pritzker Traubert Foundation

 

LOGO   

 

Charles W. Scharf 

 
   
  

 

Age: 54 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

The Bank of New York Mellon Corporation (2017-2019) (banking and financial services company)

   Chairman and Chief Executive Officer (2018-2019)

   Chief Executive Officer and Director (2017)

Visa Inc. (2012-2016)

   Chief Executive Officer and Director (2012-2016)

JPMorgan Chase & Co. (2004-2012)

   Managing Director, One Equity Partners, private investment arm (2011-2012)

   Chief Executive Officer of Retail Financial Services (2004-2011)

Bank One Corporation (2000-2004)

   Chief Executive Officer of the Retail Division (2002-2004)

   Chief Financial Officer (2000-2002)

Citigroup, Inc. (1999-2000)

   Chief Financial Officer of the Global Corporate and Investment Bank Division (1999-2000)

 

  

Microsoft Committees:

   Compensation

   Governance and Nominating

 

Other Public Company Directorships:

•   None

 

Former Public Company Directorships
Held in the Past Five Years:

   The Bank of New York Mellon Corporation

   Visa Inc.

 

Other Positions:

•   Wells Fargo & Company has announced that effective October 21, 2019, Mr. Scharf will become its President, CEO, and a member of the Board of Directors.

 


 

 


 

20    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

Arne M. Sorenson 

 
   
  

 

Age: 61 | Director Since: 2017 | Birthplace: Japan | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Marriott International, Inc. (1996-present)
(global lodging company)

   President and Chief Executive Officer (2012-present)

   President and Chief Operating Officer (2009-2012)

   Executive Vice President, Chief Financial Officer, and President, Continental European Lodging (2003-2009)

   Executive Vice President and Chief Financial Officer (1998-2003)

   Senior Vice President, Business Development (1996-1998)

  

Microsoft Committees:

   Audit

 

Other Public Company Directorships:

   Marriott International, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

 

 

LOGO   

 

John W. Stanton 

 
   
  

 

Age: 64 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Trilogy Partnerships (2005-present)

(investment company)

   Founder and Chairman (2005-present)

Clearwire Corp. (2008-2011)

   Chairman of the Board (2011-2013)

   Interim Chief Executive Officer (2011)

   Board member (2008-2011)

Western Wireless Corporation (1992-2005)

   Founder, Chief Executive Officer, and Chairman
(1992-2005)

VoiceStream Wireless Corporation (1995-2003)

   Chief Executive Officer and Chairman (1995-2003)

  

Microsoft Committees:

   Compensation (Chair)

   Regulatory and Public Policy

 

Other Public Company Directorships:

   Costco Wholesale Corporation

   Trilogy International Partners, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   Columbia Sportswear Company

 

Other Positions:

   Chairman, First Avenue Entertainment LLLP, owner of Seattle Mariners (2016-present)

 

 


 

LOGO

 


 

2019 PROXY STATEMENT  21


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

John W. Thompson 

 
   
  

 

Age: 70 | Director Since: 2012 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Microsoft Corporation (2014-present)

   Independent Board Chair

Virtual Instruments Corporation (2010-2016) (computing infrastructure performance management solutions provider)

   Chief Executive Officer and Director (2010-2016)

Symantec Corp. (1999-2011)

   Chairman of the Board (1999-2011)

   Chief Executive Officer (1999-2009)

IBM Corporation (1971-1999)

   General Manager, IBM Americas (1996-1999)

   Various positions of increasing authority (1971-1996)

 

  

Microsoft Committees:

   Governance and Nominating (Chair)

   Regulatory and Public Policy

 

Other Public Company Directorships:

   Illumina, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Partner, Lightspeed Venture Partners

 

LOGO   

 

Emma N. Walmsley 

 
   
  

 

Age: 50 | Director Since: Nominee | Birthplace: United Kingdom | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

GlaxoSmithKline plc (2010-present)
(healthcare company)

•  Chief Executive Officer (2017-present)

•  Chief Executive Officer, Consumer Healthcare (2015-2016)

•  President, Consumer Healthcare (2012-2015)

•  President, Consumer Healthcare Europe (2010-2012)

L’Oreal, S.A. (1994-2010)

•  General Manager, Consumer Products, China
(2007-2010)

•  Global Brand Head, Maybelline, USA (2002-2007)

•  UK General Manager, Garnier/Maybelline (1999-2002)

•  Various positions of increasing authority (1994-1999)

 

  

Microsoft Committees:

   Appointment will be made after election

 

Other Public Company Directorships:

   GlaxoSmithKline plc

 

Former Public Company Directorships
Held in the Past Five Years:

   Diageo plc

 


 

 


 

22    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

LOGO   

Padmasree Warrior 

 
   
  

 

Age: 58 | Director Since: 2015 | Birthplace: India | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Fable Group, Inc. (2019-present) (curated fiction and non-fiction for mobile devices)

•  Founder, President, and Chief Executive Officer
(2019-present)

NIO Inc. (2015-2018)

•  Chief Development Officer (2015-2018)

•  Board member (2015-2018)

NIO USA, Inc. (2015-2018)

•  Chief Executive Officer and Director (2015-2018)

Cisco Systems, Inc. (2008-2015)

•  Strategic Advisor (2015)

•  Chief Technology and Strategy Officer (2012-2015)

•  Chief Technology Officer, Senior Vice President, Engineering and General Manager Global Enterprise segment (2010-2012)

•  Chief Technology Officer (2008-2010)

Motorola, Inc. (1999-2007)

•  Executive Vice President and Chief Technology Officer (1999-2007)

 

  

Microsoft Committees:

   Compensation

 

Other Public Company Directorships:

   Spotify Technology S.A.

 

Former Public Company Directorships
Held in the Past Five Years:

   Box, Inc.

   The Gap, Inc.

 


 

LOGO

 


 

2019 PROXY STATEMENT  23


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

How to Communicate with our Board

We will transmit shareholder communications related to corporate governance and other Board matters to the full Board, a committee of the Board, or a director as designated in your message. Communications relating to other topics, including those that are primarily commercial in nature, will not be forwarded.

 

@  

 

askboard@microsoft.com

   

 

LOGO

 

MSC 123/9999

Office of the Corporate Secretary

Microsoft Corporation

One Microsoft Way

Redmond, WA 98052-6399

       

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported under the procedures outlined in the Microsoft Standards of Business Conduct, which is available on our Microsoft integrity website at www.microsoft.com/en-us/legal/compliance/integrity.

Director Independence Guidelines

Our Board has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our website at https://aka.ms/directorindependence. The guidelines either meet or are more restrictive than the definition of “independent director” in the listing requirements of NASDAQ and applicable laws and regulations. The guidelines identify categories of relationships the Board has determined would not affect a director’s independence and therefore are not considered by the Board in determining director independence.

Following the director independence guidelines, each year and before a new director is appointed, the Board must affirmatively determine a director has no relationship that would interfere with the exercise of independent judgment in carrying out his or her responsibilities as a director. Annually, each director completes a detailed questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and Board with relevant known facts and circumstances of any relationship bearing on the independence of a director or nominee that is outside the categories permitted under the director independence guidelines. The Committee then completes an assessment of each director considering all known relevant facts and circumstances concerning any relationship bearing on the independence of a director or nominee. This process includes evaluating whether any identified relationship otherwise adversely affects a director’s independence and affirmatively determining that the director has no material relationship with Microsoft, another director, or as a partner, shareholder, or officer of an organization that has a relationship with our Company.

The Governance and Nominating Committee also considers the tenure of a director, and for longer serving directors, whether the duration of service impacts the director’s independence from management, as demonstrated by the director’s relationship with management and the director’s participation in Board and committee deliberations. The Board seeks to maintain an average tenure of 10 years or less for its independent directors as a group.

Based on the review and recommendation by the Governance and Nominating Committee, the Board analyzed the independence of each director and nominee. The Board determined that Mses. List-Stoll, Peterson, Pritzker, Walmsley, and Warrior, Messrs. Hoffman, Johnston, Noski, Scharf, Sorenson, Stanton, and Thompson, and Dr. Panke meet the standards of independence under our Corporate Governance Guidelines, the director independence guidelines, and applicable NASDAQ listing standards, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment.

Certain Relationships and Related Transactions

We are a global company with extensive operations in the United States and many foreign countries. Every year, we spend billions of dollars for goods and services purchased from third parties. The authority of our employees to purchase goods and services is widely dispersed. Because of these wide-ranging activities, there may be transactions and business arrangements with businesses and other organizations in which one of our directors, executive officers, or nominees for director, or their immediate families, or an owner of greater than 5% of our stock, may also be a director, executive officer, or investor, or have some other direct or indirect material interest (“related entities”). We will refer to these transactions with related entities as related-party transactions where the amount involved exceeds $120,000 and a director, executive officer, or immediate family member has a direct or indirect material interest.

Related-party transactions have the potential to create actual or perceived conflicts of interest between Microsoft and its directors, executive officers, or their immediate family members. The Audit Committee has established a written policy and procedures for

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

review and approval of related-party transactions. If a related-party transaction subject to review involves directly or indirectly a member of the Audit Committee (or an immediate family member or domestic partner), the remaining Committee members will conduct the review. In evaluating a related-party transaction, the Audit Committee considers, among other factors:

 

 

The goods or services provided by or to the related party.

 

 

The nature of the transaction and the costs to be incurred by Microsoft or payments to Microsoft.

 

 

The benefits associated with the transaction and whether comparable or alternative goods or services are available to Microsoft from unrelated parties.

 

 

The business advantage Microsoft would gain by engaging in the transaction.

 

 

The significance of the transaction to Microsoft and to the related party.

 

 

Management’s determination that the transaction is in the best interests of Microsoft.

To receive Audit Committee approval, a related-party transaction must have a Microsoft business purpose and be on terms that are fair and reasonable to Microsoft and be as favorable to Microsoft as would be available from non-related entities in comparable transactions. The Audit Committee also requires that the transaction meet the same Microsoft standards that apply to comparable transactions with unaffiliated entities.

During fiscal year 2019, there were transactions between Microsoft and certain related entities, for instance the purchase of software licenses by companies of which a director is an executive officer. None of these transactions constituted a related-party transaction that required approval by the Audit Committee.

 

 

Director Compensation

The Compensation Committee periodically reviews the regular annual retainer paid to non-employee directors and makes recommendations for adjustments, as appropriate, to the Board. We have not increased director pay since fiscal year 2015. As our CEO, Mr. Nadella does not receive additional pay for serving as a director. Mr. Gates has waived his cash and stock awards.

 

Fiscal Year 2019 Compensation Structure for Directors

 

Regular Retainers (all directors except Messrs. Gates, Nadella, and Thompson)

        

Annual Base Retainer (TOTAL)

  

 

$325,000

 

Cash

  

 

$125,000

 

Stock Award

  

 

$200,000

 

Annual Committee Chair Retainer

  

 

$15,000

 

Annual Audit Committee Chair Retainer

  

 

$45,000

 

Annual Audit Committee Non-Chair Member Retainer

  

 

$15,000

 

Independent Board Chair Retainer

        

Annual Independent Chair Retainer (TOTAL – in lieu of other retainers)

  

 

$537,500

 

Cash

  

 

$125,000

 

Stock Award

  

 

$412,500

 

The Company reimburses reasonable expenses incurred for Board-related activities. Directors may participate in our corporate matching gift program for charitable donations.

Director retainers are paid quarterly in arrears. Quarterly periods are measured beginning with the annual meeting. At the end of each quarterly period, we pay 25% of the total annual retainer to each director. The number of shares awarded each quarterly period is determined by dividing the dollar value of the stock award by the market price of our common stock as of the last business day of the period. Retainers are pro-rated for directors who join or leave the Board or have a change in Board role during a quarterly period.

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER            
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

       

 

Directors may elect to defer and convert to deferred stock awards all or part of their annual cash retainer, and to defer receipt of all or part of their annual stock awards retainer under the Deferred Compensation Plan for Non-Employee Directors. Amounts deferred are maintained in bookkeeping accounts that are deemed invested in Microsoft common stock, and dividends paid on deemed investment are also deemed to be invested in our common stock. We calculate the number of shares credited by dividing the amount deferred by the closing market price of our common stock on the originally scheduled payment date. Accounts in the plan are distributed in shares of Microsoft common stock, with payments either in installments beginning on separation from Board service or in a lump sum paid no later than the fifth anniversary after separation from Board service.

Fiscal Year 2019 Director Compensation

This table describes the cash and stock award portions of the annual retainer paid to each non-employee director who served in fiscal year 2019. Mr. Nadella received no compensation as a director. He is excluded from the table because we fully describe his compensation in Part 2 – Named Executive Officer Compensation.

 

Name

      

Fees Earned or
Paid in Cash¹

($)


 

 

      
Stock Awards²
($)

 
      

All Other
Compensation3

($)


 

 

      
Total
($)

 

William H. Gates III4

    

 

0

 

    

 

0

 

    

 

0

 

    

 

0

 

Reid G. Hoffman5

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

Hugh F. Johnston

    

 

140,000

 

    

 

200,000

 

    

 

11,000

 

    

 

351,000

 

Teri L. List-Stoll6

    

 

140,000

 

    

 

200,000

 

    

 

15,000

 

    

 

355,000

 

Charles H. Noski7

    

 

170,000

 

    

 

200,000

 

    

 

0

 

    

 

370,000

 

Helmut Panke

    

 

155,000

 

    

 

200,000

 

    

 

2,500

 

    

 

357,500

 

Sandra E. Peterson8

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

Penny S. Pritzker9

    

 

125,000

 

    

 

200,000

 

    

 

15,000

 

    

 

340,000

 

Charles W. Scharf

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

Arne M. Sorenson

    

 

140,000

 

    

 

200,000

 

    

 

15,000

 

    

 

355,000

 

John W. Stanton

    

 

140,000

 

    

 

200,000

 

    

 

15,000

 

    

 

355,000

 

John W. Thompson10

    

 

125,000

 

    

 

412,500

 

    

 

15,000

 

    

 

552,500

 

Padmasree Warrior11

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

 

(1)

The value of fractional shares is excluded.

 

(2)

The aggregate award value in the “Stock awards” column for each director represents four quarterly awards, each with a grant date fair value under Financial Accounting Standards Board Accounting Standards Codification Topic 718 of $50,000, except Mr. Thompson who received three quarterly awards with a grant date fair value of $137,500 each and did not receive a stock award in the last quarter due to a reduction in the Independent Board Chair retainer.

 

(3)

Amounts in this column represent matching charitable contributions under our corporate giving program in fiscal year 2019, which matches director gifts up to $15,000 per calendar year.

 

(4)

Mr. Gates waived his cash and stock compensation.

 

(5)

Mr. Hoffman elected to defer his cash and stock compensation. The compensation deferred converted into 2,905 shares of our common stock.

 

(6)

Ms. List-Stoll elected to defer her cash and stock compensation. The compensation deferred converted into 3,037 shares of our common stock.

 

(7)

Mr. Noski elected to defer his stock compensation. The compensation deferred converted into 1,786 shares of our common stock.

 

(8)

Ms. Peterson elected to defer her cash and stock compensation. The compensation deferred converted into 2,905 shares of our common stock.

 

(9)

Ms. Pritzker elected to defer her cash and stock compensation. The compensation deferred converted into 2,905 shares of our common stock.

 

(10)

Mr. Thompson elected to defer his stock compensation. The compensation deferred converted into 3,826 shares of our common stock.

 

(11)

Ms. Warrior elected to defer a portion of her cash compensation. The compensation deferred converted into 556 shares of our common stock.

Independent Board Chair Compensation

The independent members of the Board annually appoint an independent Board Chair. Mr. Thompson currently serves as Board Chair. Mr. Thompson’s pay reflects the additional time commitment for this role compared to other independent directors, which includes: (i) calling meetings of the Board and independent directors, (ii) setting the agenda for Board meetings in consultation with other directors, the CEO, and the Corporate Secretary, (iii) chairing executive sessions and coordinating activities of the independent directors, (iv) leading the Board’s annual CEO performance evaluation, and (v) when requested, representing the Board with internal and external audiences including shareholders.

 


 

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1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

2. Named Executive Officer Compensation

 

 

Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides information about our fiscal year 2019 compensation program for our fiscal year 2019 named executive officers (“Named Executives”). The content of this Compensation Discussion and Analysis is organized into four sections:

 

   

    Table of Contents    

 

    
      
   

Section  1Compensation Governance and Philosophy

  p. 28
   

Section  2Compensation Program Design

  p. 31
   

Section  3Fiscal Year 2019 Compensation Decisions

  p. 33
   

Section 4Other Compensation Policies and Information 

  p. 39        

 

Beginning with fiscal year 2015, our Compensation Committee and Board of Directors charted a course to transform our executive pay program to include significant performance attributes.

Our multi-year effort to transform our executive pay program is grounded in a compensation philosophy aimed at achieving strong alignment between our long-term strategic goals and our shareholders’ interests. We actively engaged with our shareholders by seeking their input about features they valued as we evolved the program design.

Our Compensation Committee and Board recognized it would be premature to move to business metric-based pay before Mr. Nadella established, and the Board concurred with, his vision for the Company and the strategy that would embody that vision. As a result, performance-based pay elements were added in fiscal year 2016 once our new strategy was set. In fiscal year 2017, we implemented significant changes that increased the portion of pay that is performance-based and the portion of incentive pay that is quantitatively determined using pre-established metrics. For fiscal years 2018 and 2019, we continued the program with few changes.

We believe our focus on strategic goals, strengthening trust, and driving a strong culture have been critical to Microsoft’s success. Our fiscal year 2019 achievements include:

 

 

Revenue exceeded $125 billion.

 

 

Commercial cloud revenue grew 43% to $38.1 billion.

 

 

Server products and cloud services revenue grew 25%.

 

 

Azure revenue grew 72%.

 

 

Windows Commercial products and cloud services revenue grew 14%.

 

 

Gaming revenue grew 10% to $11.4 billion.

 

 

Surface revenue grew 23% to $5.7 billion.

 

 

LinkedIn revenue grew 28% to $6.8 billion.

Percentages are year-over-year. Commercial cloud revenue includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties.

 


 

2019 PROXY STATEMENT  27


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

 

Section 1 – Compensation Governance and Philosophy

Executive Compensation Governance

Our Compensation Committee establishes the design of our executive compensation program. After considering Mr. Nadella’s recommendations, the Compensation Committee also approves the annual target compensation (base salaries, target cash incentives, and equity incentive compensation) for our Named Executives, except Mr. Nadella. After considering the recommendation of the Compensation Committee, the independent members of our Board approve Mr. Nadella’s base salary, target cash incentive, regular stock awards, and target performance stock award.

 

Our Board and our Compensation Committee deeply value the continued interest of and feedback from our shareholders on our executive compensation program and are committed to maintaining an active dialogue with them to ensure their perspectives are thoughtfully taken into account. We carefully consider both the level of voting support from our shareholders on our say-on-pay vote, as well as comments from shareholders, when evaluating our executive compensation program. At the 2018 Annual Meeting, 96% of the votes cast supported our advisory resolution on the compensation of our Named Executives (“say-on-pay” vote). In fiscal year 2019, our Board Chair and members of management engaged with a cross-section of shareholders owning over 49% of Microsoft shares, providing regular reports of those discussions to our directors.        

    Shareholder Engagement    

 

   
     
 

 

96% 2018

say-on-pay vote

 

 

 

Engaged with
shareholders owning
over 49% of shares

 

 

Our Compensation Committee also retains, and seeks the advice of, Semler Brossy, an executive compensation consulting firm that is independent of management. See Part 1 – Governance and our Board of Directors – Board Committees for more information on Semler Brossy’s role and independence as an advisor to the Committee.

Executive Compensation Philosophy

We design our executive officer compensation program to attract, motivate, and retain the key executives who drive our success and industry leadership while considering individual and Company performance and alignment with the long-term interests of our shareholders. We achieve our objectives through a compensation program that:

 

 

Provides a competitive total pay opportunity.

 

 

Emphasizes pay for performance by delivering a majority of our executives’ pay through performance-based incentives.

 

 

Provides strong alignment with our shareholders, with at least 70% of the annual target compensation opportunity for our Named Executives delivered in the form of equity awards.

 

 

Focuses on the long term through equity awards with multi-year vesting or performance requirements.

 

 

Does not encourage unnecessary and excessive risk-taking, assisted by our stock ownership requirements and executive compensation recovery (“clawback”) policy.

Competitive Pay

We compete for senior executive talent with global information technology companies, large market capitalization U.S. companies, and smaller, high-growth technology businesses, depending on the role. The technology labor market is hyper-competitive with demand growing faster than the supply of technical talent, resulting in significant increases in compensation at the companies with whom we compete for this talent. The same conditions exist in the market for executive-level talent that can provide innovative leadership while managing at a global scale across several complex businesses. We expect these trends to continue and will adjust our approach to executive compensation to respond to evolving market conditions.

To ensure that our Board and Compensation Committee have current information to set appropriate compensation levels, we conduct an executive compensation market analysis each year that draws from third-party compensation surveys and publicly available data for a group of peer companies. We supplement this analysis with additional market information specific to each executive officer’s role and responsibilities, including information gleaned from our experience recruiting for executive positions at Microsoft. While this market analysis and supplemental data inform the decisions of the independent Board members and our Compensation Committee on the range of compensation opportunities, we do not tie executive officer compensation to specific

 


 

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1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

market percentiles. Because other companies actively recruit our executive officers to fill CEO and other senior leadership positions, we supplement market information with data on external opportunities potentially available to our executive officers. We also consider the relationship of annual target compensation among internal peers. In addition, our Committee is provided with an overview of compensation for our non-executive Microsoft employees and how this compensation relates to Mr. Nadella’s compensation.

In setting our fiscal year 2019 executive compensation design and compensation levels, we considered pay practices at the largest technology and general industry companies that were selected after review of three primary screening criteria: market capitalization, revenue, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”). As of June 30, 2019, our market capitalization was at the top of our peer group, our revenue was at the 66th percentile of our peer group, and our EBITDA was at the 91st percentile of our peer group. Our Compensation Committee selected this peer group because it believed these companies are led by executives with similarly complex roles and responsibilities. The Committee also screened these companies to ensure they had a significant presence outside the United States and excluded companies in the financial services sector because of the different regulatory environment in which they operate. For fiscal year 2019, this compensation peer group comprised these companies:

 

   

    Peer Group Used for Fiscal Year 2019 Pay Analysis    

 

    
      
   

Technology

 

       

  General Industry

 

       

•  Alphabet

•  Amazon

•  Apple

•  Cisco Systems

•  Facebook

  

•  IBM

•  Intel

•  Oracle

•  Qualcomm

    

  •  AT&T

  •  Boeing

  •  Chevron

  •  Coca-Cola

  •  Comcast

  

•  ExxonMobil

•  Johnson & Johnson

•  Merck

•  PepsiCo

•  Pfizer

  

•  Procter & Gamble

•  Verizon

•  Wal-Mart

•  Walt Disney

                       

Performance-Based Pay

Our incentive compensation arrangements are tied to specific performance measures that drive long-term performance and value creation. For fiscal year 2019:

 

 

55% of the annual target compensation opportunity for our Named Executives was performance-based, on average.

 

 

50% of the annual cash incentive for our Named Executives was tied to achieving pre-established financial targets.

 

 

50% of the annual target equity opportunity for our Named Executives was delivered in the form of a performance-based stock award with payouts based on achievement against pre-established strategic objectives.

 

 

Metrics under our performance stock awards were reviewed to ensure they reflect key business developments that drive long-term growth.

 

 

Our performance stock awards included a relative total shareholder return (“TSR”) multiplier to reward significant positive outperformance, thereby strengthening the alignment of the interests of our executive officers with the long-term interests of our shareholders.

 


 

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Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

At least 70% of the annual target compensation opportunity for our Named Executives is equity-based to incentivize a long-term focus and align their interests with those of our shareholders. Our Compensation Committee structures the pay mix for our annual target total compensation opportunities to place a higher proportion in equity awards than the companies in our compensation peer group.

 

   

    Pay Mix Versus Peers    

 

    
      

 

 

LOGO

 

Percentages derived by comparing the fiscal year 2019 target compensation levels for our Named Executives to the average of these amounts for the named executive officers of our compensation peer group companies using data available in mid-2018 when our Compensation Committee conducted our fiscal year 2019 compensation planning.

 

Long-Term Focus Through Multi-Year Vesting and Performance Requirements

All of the equity-based elements of our compensation program for our Named Executives either vest over a period of years or include long-term performance measures, like three-year relative TSR.

Discouragement of Unnecessary and Excessive Risk-Taking

We strive to meet our objectives while maintaining executive compensation leading practices that discourage unnecessary and excessive risk taking.

 

   

    Best Practices    

 

    
      

•  A stock ownership policy that reinforces the alignment of executive officer and shareholder interests (including stock ownership of 15x base salary for the CEO).

 

•  A strong executive compensation recovery (“clawback”) policy to ensure accountability.

 

•  A policy prohibiting pledging, hedging, and trading in derivatives of Microsoft securities.

 

•  No stock option awards.

  

•  No excessive perquisites (no executive-only club memberships, medical benefits) and no tax gross-ups.

 

•  No employment agreements.

 

•  No change in control benefits.

 

•  No executive-only retirement programs.

 

•  No guaranteed bonuses.

 

•  No dividends paid on unvested stock awards.

 

 


 

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1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

 

Section 2 – Compensation Program Design

Consistent with our philosophy, the compensation program for our Named Executives in fiscal year 2019 consisted of an annual base salary plus annual cash and equity incentives awarded under our Executive Incentive Plan (“Incentive Plan”). Annual cash incentives were performance-based, with 50% determined formulaically based on achievement against pre-established financial targets and 50% determined qualitatively based on performance in three weighted performance categories. Equity incentives under the Incentive Plan were allocated 50% to target performance stock awards (“PSAs”) and 50% to stock awards with four-year vesting (“SAs”). The Compensation Committee and the independent Board members believed the 50/50 balance between PSAs and SAs appropriately supported our long-term business goals and long-term retention incentives for our Named Executives.

 

   

    Fiscal Year 2019 Compensation Structure    

 

    
      
    

 

Microsoft’s pay mix targets a high proportion of equity and performance-based compensation.

      
    

 

 

LOGO

 

      

Base Salaries

Our Named Executives’ base salaries align with the scope and complexity of their roles, their capabilities, and with prevailing market conditions.

Annual Cash Incentives

Cash incentives are determined in two performance categories, as follows.

 

 

LOGO

 

*

“Incentive Plan Revenue” and “Incentive Plan Operating Income” are non-GAAP financial measures defined at page 34.

For fiscal year 2019, the financial formulaic portion of the annual cash incentives were determined based on meeting pre-established performance targets for Incentive Plan Revenue and Incentive Plan Operating Income. The fiscal year 2019 Incentive Plan Revenue and Incentive Plan Operating Income performance targets were based on meeting the Company’s internal 2019 operating budget and were higher than our fiscal year 2018 actual performance for both metrics, further reflecting appropriately ambitious performance goals.

 


 

2019 PROXY STATEMENT  31


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

The qualitative portion of each Named Executive’s fiscal year 2019 annual cash incentives was determined based on assessment of individual performance against financial, operational, and strategic indicators in three performance categories. The performance indicators varied based on the Named Executive’s responsibilities and the function or group he or she leads, and may have included (in alphabetical order in each category):

 

 

  LOGO

 

 

 

   Product & Strategy   

 

           

 

  LOGO

 

 

 

   Customers & Stakeholders   

 

         

 

  LOGO

 

 

 

   Culture & Organizational       Leadership

 

  
                                
   

 

•  Efficiency and productivity

 

•  Innovation

 

•  Product development and implementation of strategic roadmap

 

•  Quality

 

•  Revenue, consumption, and market share

 

                  

 

•  Corporate social responsibility

 

•  Customer and partner engagement and outreach

 

•  Customer satisfaction

 

•  Developer engagement

             

 

•  Compliance and integrity

 

•  Culture

 

•  Diversity and inclusion

 

•  Organizational health

    

For Mr. Nadella, the independent members of our Board also considered:

 

 

Input from Microsoft’s senior executives about Mr. Nadella’s leadership.

 

 

The scorecard we use to measure performance against Microsoft’s annual business plan.

 

 

Mr. Nadella’s evaluation of Microsoft’s and his individual performance over the past fiscal year.

Performance Stock Awards

Fiscal year 2019 PSA performance metrics are strategic measures that align with our mission and purpose, and that drive long-term performance and value creation. Targets for the PSA metrics are set at the target levels established under Microsoft’s fiscal year business plan, and are intended to be difficult but attainable. The metrics and weights used for fiscal year 2019 are in the table below.

 

   

    Fiscal Year 2019 PSA Metrics    

 

    
      
   
   

 

Performance Metrics

      

 

Description

  

 

Weights

   
   
   

Commercial Cloud Revenue*  

 

       Net revenue for commercial cloud-based solutions, including Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties    34%    
   
    Commercial Cloud Subscribers        Paid seats for current or new per-user SaaS cloud services primarily in commercial customer segment    33%    
   
   

Windows 10 Monthly

Active Devices

       Comprises all Windows 10 monthly active devices, including PCs, tablets, mobile devices, gaming consoles, and Internet of Things devices    11%    
   
    Consumer Post-Sales Monetization Gross Margin        Includes Search, Store, Display/Homepage, Gaming, and Office Consumer/Services    11%    
   
    LinkedIn Sessions        Measure of member visits as a leading indicator of the overall quality of the LinkedIn member experience and opportunity for members to realize their economic opportunity.    6%    
   
    Surface Gross Margin        Gross margin from Surface and first-party accessories, excluding Surface Hub    5%    
 

 

* “Commercial Cloud Revenue” is a non-GAAP financial measure defined at page 39.

 

 


 

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Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

The fiscal year 2019 PSA metrics were used to establish performance goals for year 3 of the 2017 PSAs, year 2 of the 2018 PSAs, and year 1 of the 2019 PSAs, as shown below.

 

   

    PSA Metrics    

 

   
     

 

 

LOGO

 

Our fiscal year 2019 PSA metric results can be found at page 38 below, under “Fiscal Year 2017 PSAs (Completed Performance Period).”

 

Stock Awards

SAs were granted under the Incentive Plan in September 2018 for shares of Microsoft common stock. These SAs vest over four years (25% on August 31, 2019 and 12.5% each six-months thereafter) to support long-term focus and align with shareholders’ interests. Vesting is subject to continued employment except as described at page 40 below.

No Other Fiscal Year 2019 Compensation

During fiscal year 2019, no other compensation was awarded to our Named Executives.

 

 

Section 3 – Fiscal Year 2019 Compensation Decisions

Our Named Executives were awarded the following compensation in fiscal year 2019:

Fiscal Year 2019 Base Salaries

As part of the annual review of target compensation opportunities, our Compensation Committee and, for Mr. Nadella, the independent members of our Board, approved increases to several of our Named Executives’ base salaries in September 2018. The independent members of our Board approved a base salary of $2.5 million for Mr. Nadella (a $1 million increase). In approving Mr. Nadella’s salary, the independent members of our Board considered his significant contributions to Microsoft’s success during his tenure as CEO, including the results described at page 27 and under the heading “Fiscal Year 2019 Stock Awards” at page 37, as well as the criticality of encouraging Mr. Nadella’s continued strong leadership. Our Compensation Committee also approved base salaries of $975,000 for Ms. Hood (a $100,000 increase) and $860,000 for Mr. Smith (a $60,000 increase) based on a competitive market review of their roles and contributions. We believe our Named Executives’ salary levels continue to be appropriate and reasonable given their roles, capabilities, and experience.

Fiscal Year 2019 Cash Incentive Awards

We did not change our target percentages for cash incentive awards, which are measured as a percentage of base salary for fiscal year 2019, which were: Satya Nadella – 300%; Amy Hood – 250%; Jean-Philippe Courtois 225%; Margaret Johnson – 200%; and Bradford Smith – 250%.

 


 

2019 PROXY STATEMENT  33


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Our Compensation Committee and, for Mr. Nadella, the independent members of our Board, determined the fiscal year 2019 cash incentive awards. These were based on two performance categories: quantitative financial results and qualitative performance results.

Final results under each portion of the cash incentive, and the resulting awards, were as follows:

 

      Nadella        Hood        Courtois        Johnson        Smith  

 

Quantitative financial results (50%)

 

  

 

 

 

 

171.81%

 

 

 

 

    

 

 

 

 

171.81%

 

 

 

 

    

 

 

 

 

171.81%

 

 

 

 

    

 

 

 

 

171.81%

 

 

 

 

    

 

 

 

 

171.81%

 

 

 

 

 

Qualitative performance results (50%)

 

  

 

 

 

 

136.67%

 

 

 

 

    

 

 

 

 

150.00%

 

 

 

 

    

 

 

 

 

150.00%

 

 

 

 

    

 

 

 

 

120.00%

 

 

 

 

    

 

 

 

 

145.00%

 

 

 

 

 

Total FY19 cash incentive (% of target)

 

  

 

 

 

 

154.24%

 

 

 

 

    

 

 

 

 

160.91%

 

 

 

 

    

 

 

 

 

160.91%

 

 

 

 

    

 

 

 

 

145.91%

 

 

 

 

    

 

 

 

 

158.41%

 

 

 

 

 

Total FY19 cash incentive ($)

 

  

 

 

 

 

$10,796,868

 

 

 

 

    

 

 

 

 

$3,855,040

 

 

 

 

    

 

 

 

 

$2,889,049

 

 

 

 

    

 

 

 

 

$2,086,456

 

 

 

 

    

 

 

 

 

$3,366,148

 

 

 

 

Quantitative Financial Results

We achieved greater than target performance on the fiscal year 2019 financial performance measures shown below, resulting in a weighted payout of 171.81%.

 

Formulaic Financial Results (50% weight)

($ in billions)

     Threshold          Target          Maximum          Actual  

 

FY19 Incentive Plan Revenue

 

  

 

 

 

 

$125.06

 

 

 

 

    

 

 

 

 

$131.50

 

 

 

 

    

 

 

 

 

$137.30

 

 

 

 

    

 

 

 

 

$135.25

 

 

 

 

 

FY19 Incentive Plan Operating Income

 

  

 

 

 

 

$37.43

 

 

 

 

    

 

 

 

 

$40.46

 

 

 

 

    

 

 

 

 

$45.31

 

 

 

 

    

 

 

 

 

$44.29

 

 

 

 

“Incentive Plan Revenue” and “Incentive Plan Operating Income” are non-GAAP financial measures. We calculate Incentive Plan Revenue by adjusting GAAP Revenue for (1) the net impact of revenue deferrals, (2) credits and incentives, and (3) the effect of foreign currency rate fluctuations. We calculate Incentive Plan Operating Income by adjusting GAAP Operating Income for the effect of foreign currency rate fluctuations. We exclude the effect of foreign currency rate fluctuations on a “constant dollar” basis by converting current period non-GAAP (i.e., adjusted for the items in the preceding two sentences) results for entities reporting in currencies other than United States dollars into United States dollars using constant exchange rates, which are determined at the outset of the current period, rather than the actual exchange rates in effect during the respective periods. These Incentive Plan financial metrics differ from the non-GAAP financial results we report in our quarterly earnings release materials. They should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

 

Qualitative Performance Results

 

Satya Nadella

 

The key results influencing the Compensation Committee and independent Board members’ decisions on the qualitative performance portion of Mr. Nadella’s cash incentive are set forth below. Results are out of a possible 200% in each category.

      LOGO

 


 

34    LOGO   


Table of Contents
1  

 

GOVERNANCE AND        

OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

   

    Weighted Performance Categories - Satya Nadella     

 

   
     
   
   

1 Product & Strategy (33.3% weight)

            LOGO  130%     
   

 

Under Mr. Nadella’s leadership and ongoing commitment to long-term success, the Company saw a strong finish to a record fiscal year delivering more than $125 billion in revenue for the full year with double-digit revenue and net income growth in 2019.

 

The commercial cloud business led the way, surpassing $38 billion in revenue, growing over 40% for the year. The strength in commercial cloud growth was across Azure, Microsoft 365, Dynamics 365, and LinkedIn. The commitment to customer success resulted in deeper partnerships and larger, longer-term cloud agreements. Microsoft continued to make investments across the key strategic areas to build new platforms and enhance and differentiate Microsoft’s technology stack, including application infrastructure, data and artificial intelligence (“AI”) business process, productivity, collaboration, and hardware. Microsoft Teams had a very successful year, with more than 13 million daily active users and 19 million weekly active users.

 

Further, the closing of the GitHub acquisition in October 2018 and its successful integration has created new opportunities to build the developer community. With GitHub, Microsoft now has the opportunity to bring all its resources to better serve this very important community of developers around the world. Microsoft also invested in building a developer toolchain independent of language, framework, or cloud. Visual Studio and Visual Studio Code are now the most popular code-editing tools in the world, and TypeScript is the fastest-growing programming language.

 

Windows 10 momentum was very strong this past year as well, reaching 800 million active devices. While opportunities remain for the Company with consumers, the Company’s Gaming business made new investments to empower the world’s gaming community. However, the Company needs to make progress to strengthen our consumer business and additional work is needed in consumer-facing strategies.

 

    
   
   

2 Customers & Stakeholders (33.3% weight)

            LOGO  145%     
   
   

 

Mr. Nadella continued to lead strong efforts to build trust with stakeholders, and his personal engagement with customers, partners, and investors has been exceptional. The fiscal year 2018 reorganization of customer facing organizations into Customer Solutions Areas, which aligned go-to-market activities more closely with customers’ desired business outcomes, directly shaped our fiscal year 2019 results. Mr. Nadella’s ongoing efforts to build trust in technology have also helped with government relationships around the world. In addition, an increased focus on customers by industry helped Microsoft prioritize and secure partnerships with beachhead/influential customers and was successful.

 

Under Mr. Nadella’s leadership and direction, the Company expanded upon its core mission that participation in every community and country leads to local economic and social benefits. Also under Mr. Nadella’s leadership, the Company has continued its purpose-driven mission of enabling people and organizations around the world to achieve more, and helped build trust on complex topics of data privacy, cybersecurity, digital safety, accessibility and artificial intelligence.

 

    
              
   
   

3 Culture & Organizational Leadership (33.3% weight)

            LOGO  135%     
   

 

Mr. Nadella continued to demonstrate his commitment to evolve Microsoft culture, where his successes include achieving aspirational goals for diversity goals in hiring and retention. In fiscal year 2019, nearly 80% of employees and managers surveyed indicated they understand how to leverage a new core priority for inclusion to contribute towards building a more diverse and inclusive workplace. Moreover, 90% of employees said their managers created an inclusive environment. Work remains to be done to provide additional training and resources for the Company’s mid-level managers and address the needs of the millennial workforce.

 

Surveys of employee sentiment and Senior Leadership Team feedback show strong support for Mr. Nadella’s cultural push for One Microsoft and Growth Mindset initiatives.

 

    
          

 


 

2019 PROXY STATEMENT  35


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Other Named Executives

The key results influencing the Compensation Committee’s decisions on the qualitative performance category portion of the cash incentive for the other Named Executives are summarized below.

 

Named Executive

   Key Results

 

Amy E. Hood

  

 

•  Supported record year financial performance and management with revenue growth of 14% and operating income growth of 23% and returned over $30 billion in cash to shareholders through stock buybacks and dividends.

 

•  Drove significant cost savings through initiatives across Support, Commerce and Core Services Engineering and Operations functions with improved processes driving down costs and reducing duplicate efforts across the portfolio.

 

•  Continued solid strategic investment strategy with numerous merger and acquisition deals across the portfolio, including in Cloud and Enterprise, Gaming, Search, Productivity, and LinkedIn.

 

•  Increased sponsorship of key strategic customers, leveraging the experience of the finance organization to help fellow Chief Financial Officers understand the power of digital transformation.

 

•  Provided effective communication to investors regarding the Company’s strategic goals.

 

•  Strong advocate for inclusion within the finance organization and across the Company and contributed to refreshed Manager behavior framework.

 

•  Relentless focus on developing internal talent and providing opportunities for growth with launch of learning paths to deepen product knowledge and technical skills training across the finance organization.

 

Jean-Philippe Courtois

  

 

•  Led Global Sales, Marketing, and Operations (“GSMO”) groups to deliver strong financial performance and contributed to the commercial cloud business becoming the largest in the world, surpassing $38 billion in annual revenue.

 

•  Positioned Microsoft as the cloud technology provider of choice with over 95% of the Fortune 500 trusting Azure for their mission-critical workloads.

 

•  Grew Microsoft’s reputation as a responsible AI leader through engaging with government officials to advocate for ethical policies and advance AI research and development initiatives.

 

•  Contributed to investments in developer community outreach with implementation of local developer relations teams to support the Company’s global developer engagement model.

 

•  Embodied “customer obsessed” culture attribute through partnerships with product teams to highlight customer needs.

 

•  Strong focus on embedding diversity and inclusion conversations and learning moments in the field culture and across the Company. Continued investment in coaching mindset for all managers.

 

Margaret L. Johnson

  

 

•  Contributed to the launch of Microsoft’s newest Customer Solution Area of Search, Ads, and News through partnerships across the Company, reflective of our “One Microsoft” mindset.

 

•  Partnered with field leadership to refine strategic industry verticals to enable tailored consultation for customers.

 

•  Supported the launch of the new M365 Developer Platform enabling partners to build people-centric experiences powered by the Microsoft Graph.

 

•  Led strategic investments through Microsoft’s venture fund, M12, solidifying the Company’s presence as a top corporate venture capital player. Enhanced controls and oversight of deal terms and execution with new governance structure.

 

•  Trusted industry relationships led to new opportunities and continued cross-company growth.

 

•  Championed diversity and inclusion within business development and across the Company. Supported the execution of the first global Female Founders competition, seeking to accelerate funding for top women-led startups focused on enterprise technology solutions.

 


 

36    LOGO   


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Named Executive

   Key Results

 

Bradford L. Smith

  

 

•  Continued advances in operational security and enforcement by Microsoft’s Digital Crimes Unit and through a new Defending Democracy Program to enhance cybersecurity protection for the world’s democracies. Helped lead the initiation of the Paris Call for Trust and Security in Cyberspace, a significant step in bringing together international governments and stakeholders from around the world.

 

•  Directed industry-leading approach to extend the European Union’s General Data Protection Regulation (“GDPR”) rights to all customers globally.

 

•  Provided thought leadership on Responsible AI, including taking the initiative on facial recognition issues with Company principles and proposed legislation. Grew AI for Good suite from two to four programs with addition of AI for Humanitarian Action and AI for Cultural Heritage.

 

•  Provided industry leadership to address digital safety issues, including support for the Christchurch Call to bring governments, industry, and civil society groups together.

 

•  Continued focus on sustainability initiatives across Microsoft, and on accessibility improvements, including by extending efforts to LinkedIn and GitHub to advance features across the portfolio.

 

•  Contributed to launch of an affordable housing initiative in the Puget Sound area and committed to continued focus on driving policy change.

 

•  Enhanced investments on supporting employee relations investigations team, and championed importance of inclusive behaviors by all across the Company.

Fiscal Year 2019 Stock Awards

In September 2018, the independent members of our Board reviewed Mr. Nadella’s annual equity compensation given his significant contributions to Microsoft’s success, and the fact that the long-term performance stock award granted to Mr. Nadella at his appointment to CEO would begin to vest in February 2019 and be fully vested in two and one-half years. In reviewing Mr. Nadella’s annual equity compensation, the independent members of our Board recognized the benefit of Mr. Nadella’s proficiency as CEO, as demonstrated by Microsoft’s achievements during his tenure including:

 

 

Market capitalization that grew from $302 billion (upon Mr. Nadella’s February 2014 promotion to CEO) to over $850 billion on September 4, 2018;

 

 

Mr. Nadella’s strategic leadership, including his efforts to strengthen trust with customers, drive for a company-wide culture change, and successful entry and expansion into new technologies and markets;

 

 

Strong execution of Mr. Nadella’s vision for the Intelligent Cloud; and

 

 

Microsoft’s significantly larger scale relative to most market peers on measures of revenue, operating income, and market capitalization.

The independent members of the Board also concluded that it would be desirable to have the same pay structure for Mr. Nadella and other Named Executives; and to ensure that Mr. Nadella’s incentives are aligned to shareholder returns by emphasizing equity compensation. In light of these considerations, the independent members of the Board increased Mr. Nadella’s annual target equity compensation by $10,000,000, split evenly between PSAs and SAs.

The fiscal year 2019 PSAs and SAs granted to our Named Executives under the Incentive Plan are listed below.

 

Named Executive

   PSAs
(Target Number
of Shares)¹
     SAs
(Number
of Shares)²
     Aggregate
Target
Award Value³
($)
 

 

 

Satya Nadella

  

 

111,280

 

  

 

111,280

 

  

 

25,000,000

 

 

 

Amy E. Hood

  

 

49,854

 

  

 

49,854

 

  

 

11,200,000

 

 

 

Jean-Philippe Courtois

  

 

33,384

 

  

 

33,384

 

  

 

7,500,000

 

 

 

Margaret L. Johnson

  

 

22,256

 

  

 

22,256

 

  

 

5,000,000

 

 

 

Bradford L. Smith

  

 

40,951

 

  

 

40,951

 

  

 

9,200,000

 

 

 

 

(1)

The PSAs vest in full following the end of the three-year performance period, with the number of shares earned determined based on performance against goals set for each year in the period and relative TSR results for the period.

 


 

2019 PROXY STATEMENT  37


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

(2)

The SAs vest 25% on August 31 following the date of grant and thereafter 12.5% each six months until fully vested. Vesting is subject to continued employment except as described at page 40 below.

 

(3)

Awarded value (in dollars) was converted to shares using the closing share price on August 31, 2018, rounded up to a whole number.

The amounts listed in the table above for fiscal year 2019 PSAs will not match the amounts in the Stock Award column in the Summary Compensation Table or the Grants of Plan-Based Awards table. Because the grant date of a PSA occurs when the performance targets are set, and targets under our PSA awards are established annually, SAs listed in the Summary Compensation Table and Grants of Plan-Based Awards table include portions of current and prior year PSA awards, as described in more detail in Note (2) to the Summary Compensation Table on page 43.

Vesting of Mr. Nadella’s Long-Term Performance Stock Award

Upon Mr. Nadella’s appointment to CEO, he was granted a one-time long-term performance-based stock award (“LTPSA”). LTPSA payouts are tied to Microsoft’s total shareholder return relative to the S&P 500 (“relative TSR”) over three overlapping five-year performance periods. The first of these periods commenced with Mr. Nadella’s appointment as CEO and ended February 3, 2019. Under the LTPSA, target awards are paid if Microsoft’s relative TSR is at the 60% level, and at the maximum 150% of target level if Microsoft’s relative TSR is at or above the 80% level. For each of the three five-year performance periods, the number of shares earned at threshold is 150,000, at target 600,000, and at maximum 900,000. During the first five-year performance period, Microsoft’s market capitalization increased $509 billion (from $302 billion to $811 billion), and Microsoft’s relative TSR was in the 97th percentile, resulting in Mr. Nadella earning and vesting in the maximum 900,000 shares.

Fiscal Year 2017 PSAs (Completed Performance Period)

Our Compensation Committee (and for Mr. Nadella, the independent members of our Board) granted PSAs in fiscal year 2017 (“fiscal year 2017 PSAs”) that pay out based on specific pre-established, performance goals and strategic performance objectives tied to creating long-term shareholder value. Performance was measured over the three-fiscal year performance period ending June 30, 2019. The maximum award for the fiscal year 2017 PSAs was 300% of target, reduced from the 400% of target maximum applicable to the fiscal year 2016 PSAs.

The actual performance under the fiscal year 2017 PSAs reflected the strong business achievement on core metrics and Microsoft’s relative TSR during this period. Performance on the core metrics under these PSAs is shown in the following table:

Fiscal Year 2017 PSA Core Metric Results

(Payouts as Percentage of Target Award)

 

    Commercial
Cloud
Revenue
     Commercial
Cloud
Subscribers
     Windows 10
Monthly
Active
Devices
    

Consumer
Post-Sales
Monetization
Gross

Margin

     Surface
Gross
Margin
     LinkedIn
Sessions
     Weighted
Performance
for FY (%)
 
 

 

 

 
     (34% weight
per year)
     (33% weight
per year)
     (11% weight
per year)
     (11% weight
per year)
    

 

(11% weight
FY17,
5% weight
FY18, FY19)

     (6% weight
per year)
 

FY17

 

 

60.711

 

  

 

80.552

 

  

 

92.703

 

  

 

2004

 

  

 

05

 

  

 

N/A

 

  

 

79.42%

 

FY18

 

 

2001

 

  

 

2002

 

  

 

2003

 

  

 

2004

 

  

 

2005

 

  

 

2006

 

  

 

200%

 

FY19

 

 

99.161

 

  

 

114.792

 

  

 

129.463

 

  

 

144.334

 

  

 

105.415

 

  

 

110.826

 

  

 

113.63%

 

Core Metric Performance (average of FY17, FY18, and FY19 performance):

 

  

 

131.02%

 

 

(1)

Results/targets (in billions) were: FY17 $14.94/$15.82, FY18 $22.89/$22.38, and FY19 $38.63/$38.67.

 

(2)

Results as percentage of target were: FY17 96.55%, FY18 103.50%, and FY19 101.36%.

 

(3)

Results/targets (in millions) were: FY17 499.72/506.00, FY18 694.06/608.98, and FY19 860.56/824.15.

 

(4)

Results as percentage of target were: FY17 110.35%, FY18 114.03%, and FY19 104.86%.

 

(5)

Results as percentage of target were: FY17 66.30%, FY18 134.21%, and FY19 101.65%.

 

(6)

Results/targets (in billions) were: FY18 25.61/21.70, and FY19 32.52/32.11.

 


 

38    LOGO   


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1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

“Commercial Cloud Revenue” is a non-GAAP financial measure, calculated by adjusting GAAP results for the effect of foreign currency rate fluctuations. We exclude the effect of foreign currency rate fluctuations on a “constant dollar” basis by converting current period non-GAAP results for entities reporting in currencies other than United States dollars into United States dollars using constant exchange rates, which are determined at the outset of the fiscal year, rather than the actual exchange rates in effect during the respective periods. These metric results differ from certain non-GAAP financial results we report in our quarterly earnings release materials; they should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Relative TSR Multiplier

The core metric results for the fiscal year 2017 PSAs were then subject to adjustment based on the relative TSR performance multiplier, which compares our TSR for the three-fiscal year performance period to the TSR of the S&P 500. Our TSR for the performance period was positive and ranked in the 97th percentile of the S&P 500. Based on this positioning, the total payment percentage for the fiscal 2017 PSAs was increased by 50%, resulting in the payout to our Named Executives of 196.53% of the target fiscal 2017 PSA shares.

Fiscal Year 2018 and 2019 PSAs (Open Performance Periods)

Performance under the fiscal year 2018 and 2019 PSAs will be assessed following the end of the three-year performance periods ending June 30, 2020 and 2021, respectively. The number of shares of common stock to be earned will be based on an assessment of (1) performance against the metric goals during the applicable performance period, and, if Microsoft’s absolute TSR is positive during the period, and (2) Microsoft’s relative TSR during the period. The metrics and relative weightings under the fiscal year 2018 and 2019 PSAs are as follows:

 

Metrics

   Weights
(%)
 

Commercial Cloud Revenue

  

 

34

 

Commercial Cloud Subscribers

  

 

33

 

Windows 10 Monthly Active Devices

  

 

11

 

Consumer Post-sales Monetization Gross Margin

  

 

11

 

LinkedIn Sessions

  

 

6

 

Surface Gross Margin

  

 

5

 

Total

  

 

100

 

 

 

Section 4 – Other Compensation Policies and Information

No Significant Executive Benefits and Perquisites

Our Named Executives are eligible for the same benefits available to our other full-time employees. In the U.S., our benefits include our section 401(k) plan, employee stock purchase plan, health care plan, life insurance plans, and other welfare benefit programs. In addition to the standard benefits offered to all U.S. employees, we maintain a nonqualified deferred compensation plan for our U.S. executive officers and senior managers. This deferred compensation plan is unfunded, and participation is voluntary. The deferred compensation plan allows our Named Executives to defer their base salary, the cash portion of their Incentive Plan awards, and certain on-hire bonuses. We do not contribute to the deferred compensation plan. Named Executives are eligible for matching gifts for charitable donations above the maximum for our other U.S.-based full-time employees. Mr. Courtois participates in the standard benefits for employees in France, including profit sharing and the car allowance program available to senior managers.

During fiscal year 2019, we provided no executive-only perquisites or other personal benefits to our Named Executives other than matching gifts made to charitable organizations.

Post-Employment Compensation

Our Named Executives do not have employment contracts. No Named Executive is entitled to any payments or benefits following a change in control of Microsoft.

 


 

2019 PROXY STATEMENT  39


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Our Named Executives may be eligible for additional vesting of their outstanding SAs following termination of employment on the same terms as our other employees. All U.S. employees who retire from Microsoft after (a) age 65 or (b) age 55 with 15 years of service are eligible for the continuation of vesting of outstanding SAs granted at hire or at the time of annual performance review, if the award was granted over one year before the date of retirement. A pro-rata portion of PSA shares will also continue vesting if the retirement occurs more than one year after the beginning of the performance period. As of June 30, 2019, only Mr. Smith was retirement eligible, and the value of his SAs and PSAs eligible for continued vesting if he retired on that date was $24,131,956 (assuming PSAs are earned at 100% of target). All employees whose employment with Microsoft terminates due to death or total and permanent disability generally fully vest in their outstanding SAs. Our PSAs, and Mr. Nadella’s LTPSA that was granted to him in connection with his appointment as CEO, vest for the target number of shares upon death or total and permanent disability. The value of our Named Executives’ SAs, PSAs, and LTPSAs that would have vested assuming a June 30, 2019 termination of employment due to death or total and permanent disability was: Mr. Nadella, $239,491,545; Ms. Hood, $43,767,545; Mr. Courtois, $37,557,695; Ms. Johnson, $22,217,534; and Mr. Smith, $37,552,069.

In addition, our Named Executives are eligible to participate in the Microsoft Senior Executive Severance Benefit Plan (“Severance Plan”). The Severance Plan was adopted to help ensure continuity of key leaders by providing designated executives severance payments and benefits if their employment is terminated without cause. For purposes of the Severance Plan, “cause” means (i) a conviction or plea of guilty or no contest to a felony or certain misdemeanors; (ii) engaging in gross misconduct; (iii) repeated failure to substantially perform the duties of the executive’s role; (iv) violation of any securities laws; or (v) violation of Microsoft’s policies designed to prevent violations of law.

The Severance Plan payments and benefits have four components – cash, stock vesting, continued health care, and outplacement assistance – all provided by Microsoft. Cash payments consist of (i) a severance payment equal to 12 months’ base salary plus target annual cash incentive award, payable in a lump sum within 60 days after termination of employment; and (ii) a pro-rata payment of the executive officer’s target annual cash incentive award for the partial year of work, payable in a lump sum at the same time other Incentive Plan cash awards for the year are paid. Stock vesting applies to SAs and PSAs. SAs that otherwise would vest in the 12-month period after employment terminates continue to vest. After the first year of the PSA performance period is completed, a pro-rata portion of any PSA shares will also vest, and the number of shares subject to pro-ration is the lesser of the target award shares or the shares that are otherwise earned and payable after the end of the performance period. Continued contributions to premiums for COBRA health care continuation coverage and outplacement assistance will be provided on the same terms as are available to other employees whose employment is terminated without cause. There is no change-in-control provision in the Severance Plan. To receive the Severance Plan payments and benefits, the Named Executive must execute a separation agreement that includes a release of claims in favor of Microsoft, confidentiality and non-disparagement provisions, and 12-month non-compete/non-solicitation restrictions.

Mr. Nadella participates in the Severance Plan on the same terms as our other executive officers, except that under his LTPSA award, if Microsoft terminates his employment without cause (as defined in the Severance Plan) during a performance period, he will vest in a pro-rata fraction of the threshold 150,000 shares of Microsoft common stock subject to the award for his actual period of employment during the performance period.

This table shows the amounts that would have been payable to our Named Executives upon a termination of employment without cause on June 30, 2019.

 

Named Executive

  

Amount
Payable

($)

 

Satya Nadella

  

 

$96,811,443

1 

Amy E. Hood

  

 

$33,784,836

 

Jean-Philippe Courtois

  

 

$29,716,897

 

Margaret L. Johnson

  

 

$18,090,259

 

Bradford L. Smith

  

 

$33,227,724

2 

 

(1)

Includes $65,330,843 in Severance Plan benefits, in addition to $31,480,600 in stock vesting under Mr. Nadella’s LTPSA award.

 

(2)

Includes $9,095,768 in Severance Plan benefits, in addition to $24,131,956 in retirement-based stock vesting under Mr. Smith’s SAs and PSAs.

 


 

40    LOGO   


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Strong Clawback Policy

Accountability is a fundamental value of Microsoft. To reinforce this value through our executive compensation program, our executive officers and certain other senior executives are subject to a strong ‘no fault’ executive compensation recovery (“clawback”) policy. Under this policy, our Compensation Committee may seek to recover payments of incentive compensation if the performance results leading to a payment are later subject to a downward adjustment or restatement of financial or nonfinancial performance. Our Committee may use its judgment in determining the amount to be recovered where the incentive compensation was awarded subjectively. Our Committee may also seek recovery of up to the entire amount of any incentive compensation awarded during a period where a covered executive committed a significant legal or compliance violation. Our executive compensation recovery policy is available on our website at https://aka.ms/policiesandguidelines.

Robust Stock Ownership Policy

Our executive officers and certain other senior executives are required to maintain a minimum equity stake in Microsoft. This policy embodies our Compensation Committee’s belief that our most senior executives should maintain a significant personal financial stake in Microsoft to promote a long-term perspective in managing our business. In addition, the policy helps align executive and shareholder interests, which reduces incentive for excessive short-term risk taking. Each covered executive is required to acquire and maintain ownership of shares of Microsoft common stock equal to a specified multiple of his or her base salary, which ranges from 5 to 15 times base salary, as shown in the table below. Each covered executive must retain 50% of all net shares (post-tax) that vest until achieving his or her minimum share ownership requirement.

 

Named Executive

  

Share Ownership

Requirement as of

June 30, 2019

 

Satya Nadella

  

 

15x base salary

 

Amy E. Hood

  

 

8x base salary

 

Jean-Philippe Courtois

  

 

8x base salary

 

Margaret L. Johnson

  

 

5x base salary

 

Bradford L. Smith

  

 

8x base salary

 

In fiscal year 2019, each of our Named Executives complied with our stock ownership policy. Our stock ownership policy is available on our website at https://aka.ms/policiesandguidelines.

Hedging Policy

Our Named Executives are subject to our Derivatives Trading, Hedging, and Pledging policy described at page 10.

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code (“Section 162(m)”) imposes an annual deduction limit of $1 million on the amount of compensation paid to each of the CEO, the CFO, and certain other current or former named executive officers (together, “covered employees”). Prior to the effectiveness of the Tax Cuts and Jobs Act of 2017 (“TCJA”), the deduction limit did not apply to “performance-based compensation” satisfying the requirements of Section 162(m). Cash and equity awards granted to our Named Executives under the Incentive Plan reported in the summary compensation table for fiscal years 2017 and 2018 were subject to one or more performance goals intended to satisfy the requirements of the exemption to Section 162(m) for performance-based compensation, including a requirement of positive operating income for the fiscal year. The performance goal of positive operating income for the first fiscal year following the award also applied to the LTPSA granted to Mr. Nadella in February 2014. For fiscal year 2017 and 2018, the performance goals were approved by our Compensation Committee, following shareholder approval of the material terms of these performance goals under the Incentive Plan. Payment under the awards is conditioned on Committee certification that the goals and any other material terms have been met. Effective with fiscal year 2019, the TCJA eliminated the Section 162(m) provisions exempting performance-based compensation and deferred compensation amounts payable after termination from employment from the $1 million deduction limit, subject to an exception for remuneration pursuant to a written binding contract which was in effect on November 2, 2017. Based on current law, we believe the remuneration under our Incentive Plan reported in the summary compensation table that qualifies for this “written binding contract” exception is:

 

 

The portion of fiscal year 2018 cash incentives payable based on formulaic financial results.

 

 

Payments under fiscal year 2017 and 2018 SAs.

 


 

2019 PROXY STATEMENT  41


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

 

Payments under our fiscal year 2017 and 2018 PSAs to the extent attributable to fiscal year 2017 or 2018 performance against metrics established for those years.

Notwithstanding the foregoing, the SAs and PSAs that vest upon a Named Executive’s termination of employment due to death or total and permanent disability prior to attainment of the Section 162(m) performance goal would not be deductible as performance-based compensation.

In structuring compensation for our executive officers, our Compensation Committee considers whether compensation will be deductible for federal income tax purposes. However, the changes implemented to Section 162(m) under the TJCA are expected to significantly limit deductibility of compensation paid under current and future awards to covered employees. Accordingly, our Committee awards compensation that is nondeductible.

 

   

    Annual Compensation Risk Assessment    

 

   
     

 

We performed an annual assessment for the Compensation and Audit Committees of our Board of Directors to determine whether the risks arising from our fiscal year 2019 compensation policies and practices were reasonably likely to have a material adverse effect on Microsoft. Our assessment reviewed the material elements of executive and non-executive employee compensation. We concluded these policies and practices do not create risk that is reasonably likely to have a material adverse effect on Microsoft.

 

The structure of our compensation program for our executive officers does not incentivize unnecessary or excessive risk-taking. The base salary component of compensation does not encourage risk-taking because it is a fixed amount. The Incentive Plan awards have these risk-limiting characteristics:

 

•  Cash incentive awards under the Incentive Plan are limited to 200% of a target cash incentive award.

 

•  Cash incentive awards are structured 50% based on pre-established goals (balance of growth and profitability goals) and 50% based on individual performance as assessed across three performance categories, diversifying the risk associated with any single aspect of performance.

 

•  The majority of Incentive Plan award value is delivered in shares of Microsoft common stock with multi-year vesting schedules or performance periods, which aligns the interests of our executive officers to long-term shareholder interests.

 

•  PSA metrics further diversify the elements of the program to minimize the incentive to produce any particular outcome.

 

•  PSAs use Company-wide measures that are not specific to any one executive officer’s sphere of responsibility and that apply equally to all participants to encourage a unified and responsible approach to achieving financial and strategic goals.

 

•  Overlapping performance periods for PSAs limit the impact of short-term business performance or share price fluctuations on final outcomes.

 

•  Equity awards are not made in the form of stock options, which may provide an asymmetrical incentive to take unnecessary or excessive risks to increase the market price of Microsoft common stock.

 

•  Members of our Compensation Committee (or for Mr. Nadella, the independent members of our Board of Directors) approve all Incentive Plan awards to executive officers, including performance achievement levels that determine final payout outcomes.

 

In addition, awards are subject to our Executive Compensation Recovery Policy, described in this Section 4 – Other Compensation Policies and Information – Strong Clawback Policy.

Executive officers are subject to our executive stock ownership requirements, described in this Section 4 – Other Compensation Policies and Information – Robust Stock Ownership Policy.

 


 

42    LOGO   


Table of Contents
1  

 

GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

 

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis provided above. Based on its review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

Compensation Committee

John W. Stanton (Chair)

Sandra E. Peterson

Charles W. Scharf

Padmasree Warrior

 

 

Fiscal Year 2019 Compensation Tables

Summary Compensation Table

This table contains information about compensation awarded to our Named Executives for the fiscal years ended June 30, 2019, 2018, and 2017. None of our Named Executives received stock options during those years.

 

Named Executive and

Principal Position

  Year    

Salary

($)

   

Stock

Awards1

($)

    Non-equity
Incentive Plan
Compensation2
($)
    All Other
Compensation3
($)
    

Total

($)

 

 

Satya Nadella

 

Chief Executive Officer

and Director

 

 

2019

 

 

 

2,333,333

 

 

 

29,668,651

 

 

 

10,796,868

 

 

 

111,363

 

  

 

42,910,215

 

 

 

2018

 

 

 

1,500,000

 

 

 

16,807,208

 

 

 

7,425,000

 

 

 

111,055

 

  

 

25,843,263

 

 

 

2017

 

 

 

1,450,000

 

 

 

11,434,557

 

 

 

7,032,406

 

 

 

97,189

 

  

 

20,014,152

 

 

Amy E. Hood

 

Executive Vice President and

Chief Financial Officer

 

 

2019

 

 

 

958,333

 

 

 

15,316,653

 

 

 

3,855,040

 

 

 

97,608

 

  

 

20,227,634

 

 

 

2018