Microsoft dings Ballmer's bonus over Windows 8, Surface RT struggles

The penalty is equivalent to half the cost of a cup of coffee at McDonalds to the average American

Microsoft's board of directors reduced outgoing CEO Steve Ballmer's bonus for the 2013 fiscal year, citing poor performance of Windows 8 and the $900 million Surface RT write-off, according to a filing with the U.S. Securities and Exchange Commission.
Microsoft CEO Steve Ballmer
Microsoft CEO Steve Ballmer (Photo: Microsoft)

The Redmond, Wash., company's proxy statement spelled out the salaries and bonuses of several of its top executives, including Ballmer, new Chief Financial Office Amy Hood and Chief Operating Officer Kevin Turner, as well as now-departed managers such as former CFO Peter Klein and Office chief Kurt DelBene.

Microsoft paid Ballmer $697,500 in salary and awarded him a $550,000 performance bonus, for a total of $1.26 million for fiscal year 2013.

The bonus was less than Ballmer could have earned.

"Our Board of Directors approved an Incentive Plan award of $550,000 which was 79% of Mr. Ballmer's target award," stated the proxy. One hundred percent of the target would have been $696,000.

The 79% was considerably lower than Ballmer's comparable number for the 2012 fiscal year, when he was granted a bonus representing 91% of his target.

Microsoft's board cited both company wins and losses under Ballmer's stewardship, but the latter included some failures that were the root of its bonus decision.

"While the launch of Windows 8 in October 2012 resulted in over 100 million licenses sold, the challenging PC market coupled with the significant product launch costs for Windows 8 and Surface resulted in an 18% decline in Windows Division operating income," the proxy noted. "Slower than anticipated sales of Surface RT devices and the decision to reduce prices to accelerate sales resulted in a $900 million inventory charge."

Some analysts have speculated that the $900 million write-off was the proverbial straw that broke the board's back, and triggered Ballmer's ouster. In an interview with the Wall Street Journal last week, however, John Thompson, the lead independent director and the head of the committee in charge of the search for a new chief executive, backed Ballmer's explanation for his sudden retirement: He did not want to remain in the job through the long course correction to a "devices-and-services" strategy.

The proxy statement's commentary on the strategy change, as well as the corporate reorganization announced in July, was Ballmer-neutral. "The company continued to make progress in its devices and services strategy," the filing read.

Last year, Ballmer's bonus was pegged at 91% of his target as the board ticked off several issues during that fiscal year, including a 3% decline in revenue for the Windows and Windows Live Division, and a fiasco where Microsoft failed to offer a browser choice screen to Windows 7 customers in the European Union.

Ballmer's 2013 bonus of 79% was an even lower percentage than that of Steven Sinofsky last year. Then, the former Windows chief -- who was ousted in November 2012 -- received 90% of his target award, even though he, like Ballmer, was cited as responsible for the EU browser choice screw-up.

Other top-tier executives received 100% or more of their target bonuses for 2013.

Kevin Turner, the COO, received a cash award of $2.1 million, or 100% of his target, and Satya Nadella, who now leads the Cloud and Enterprise group, received $1.6 million, or 105% of his target. Amy Hood, the new CFO, was handed $457,443, 100% of her target incentive, and as part of her promotion, received a stock award in May of 103,413 shares that will vest over the next three years. At Thursday's closing price, those shares had a paper value of $3.5 million.

In total compensation for the 2013 fiscal year, Turner remained Microsoft's highest-paid executive at $10.4 million, down slightly from 2012's $10.7 million.

Eight of the company's top executives, including Turner and Hood, were handed additional stock grants Sept. 19, the same day Microsoft announced a retention bonus designed to keep upper management from jumping ship during the CEO search. Turner, for example, received grants currently worth $20.3 million. Hood's award was valued at Thursday's closing bell at nearly $3.9 million.

No one should cry for Ballmer's lowered bonus: According to the proxy, he controls 4% of the company, with stock holdings worth $11.3 billion at Thursday's price. Only co-founder and chairman Bill Gates holds more: 4.5%, or $12.8 billion.

The $146,000 that Ballmer did not get in his 2013 bonus is literally pocket change to the billionaire. The amount represented 0.0013% of Ballmer's Microsoft holdings, and an even smaller percentage of his total wealth. To put that into perspective, 0.0013% of $42,693, the U.S. per capita personal income in 2012, is 55 cents, or just over half the price of a coffee from McDonalds "Dollar Menu."

Ballmer and Gates are both on the directors slate for re-election next month when Microsoft hosts its shareholders meeting.

According to a report by the Reuters new service earlier this week, some of Microsoft's biggest investors have urged the board to push Gates out of the chairman's role because they are concerned he will block the board from making drastic changes and handcuff the new CEO to the devices-and-services strategy, which they question. Gates is also on the special search committee tasked by the board to recommend Ballmer's replacement.

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Microsoft alum: Windows 8 "a much deadlier assault weapon" than Windows 7

Former Microsoft senior VP says Windows 8 on ARM tablets is a "scale 9 earthquake"


Windows 8 is just what Microsoft needs to take advantage of the ongoing irreversible shift from PCs to handheld devices including iPads, iPhones and other form factors yet to be designed, according to the company's former OEM chief.

Just as Windows 7 won instant popularity after the debacle of Vista, Windows 8 is poised to capture business from phone and tablet leaders such as Apple, only to greater effect, says Joachim Kempin, former Microsoft senior vice president in charge of OEMs who worked for the company from 1983 to 2002.

"Windows 7 spearheaded a comparably small rejuvenation," Kempin says in his just-released book "Resolve and Fortitude: Microsoft's Secret Power Broker Breaks his Silence". "I predict Windows 8 is readied as a much deadlier assault weapon."

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He says the main intent of Windows 8 is to push the operating system into low-powered mobile devices running ARM processors vs traditional x86 chips. He says that when Microsoft introduced Windows 8 nearly two years ago it "flabbergasted the IT world by running on a tablet powered by NVidia's ARM-based CPU. I consider this move to ARM a scale 9 earthquake and wake-up call for MS's longtime allies Intel and AMD."

He says that shift potentially signals the end of notebooks and PCs, not just media tablets. A strength of Windows 8 is its common interface and navigation across all devices, he says.

"No need to bother with the annoyance of having to remember different key strokes or gestures when switching between devices or operating them with a mouse or a touch screen," Kempin says. "Neither Apple nor Google have ever accomplished such uniformity."

He praises the design of Microsoft's two Surface tablet models but dooms them to failure.

He thinks they will anger OEMs that were working on their own Windows 8 tablets and notebooks and who now may be driven to make them with Linux or Google operating systems.

In addition, he doubts the devices themselves can be profitable. "MS does not own a factory and has a track record of having trouble with sourcing hardware components and producing devices as cheaply as her competitors," he says. "I do not know who did the math on this project. The slim revenue gain with not much hope for real profits combined with losing partners' trust and loyalties seems not worth that risk."

Instead, Microsoft should spin off a startup with the mission of making Windows 8 devices, putting a distance between the devices and Microsoft itself and creating just another OEM that competes with current OEMs.

Still, he likes Surface RT. "Adding an innovative wireless keyboard makes it a hybrid located between today's notebooks and tablets," he says. "When combined with the slick design promises to totally obsolete notebooks in a few years when solid state drives will become cheap and small enough to replace traditional hard drive storage units."

He admires the strategy of porting Office applications to Windows 8 tablets based on ARM, known as Windows RT. Other tablets can support Office but only via remote services, not locally. "Less need for constant connectivity for 8-powered tablets when running MS-Office applications means a further leg up over Google's solution," he writes.

Apparently the book was written before Microsoft's Windows 8 leader Steven Sinofsky quit the company just after Windows 8 launched Oct. 26. Kempin says the company should tap Sinofsky to champion Surface as a product fanatic as focused as Steve Jobs was at Apple.

"Like others I always wait for a service pack to be released before trusting a new OS version," Kempin says. "[Sinofsky] will need to correct this notion with product excellence right out of the chute to gain vital momentum. This is in particular important for changing MS's fortune in the media tablet market where Apple, Google and Amazon are seen as leaders.

Blindly mimicking Apple in order to take sales from it is a mistake, and that means getting rid of its new brick and mortar Windows Stores. "The company needs to get rid of all distractions like her doomed retail stores," he writes.

He says Microsoft's investment in Barnes & Noble and its Nook e-reader represent an assault on Amazon and its Kindle tablets and e-readers. He says Microsoft miscalculated the market for them when it devoted research into the devices in 1998. "But the developers involved in this effort were told to shut down because their solution was not Windows centric enough," he says.

That was the wrong way to look at it, though. "You do not need Windows to read a book - MS-DOS would have sufficed and could have easily been replaced with more advanced technology later," he says.

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