DEF 14A 1 d461626ddef14a.htm DEF 14A DEF 14A
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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)

 

 


(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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     LOGO     
Notice of Annual Shareholders Meeting and   

Proxy Statement 2017

 

  

 

November 29, 2017

8:00 a.m. Pacific Time

  

 

Meydenbauer Center

11100 NE 6th Street

Bellevue, Washington 98004

  

 

LOGO


Table of Contents

 

Letter from our Independent Chairman and our CEO

 

 

LOGO

 

 

 

 

 

LOGO

    

 

 

 

October 16, 2017

 

Dear Shareholder,

 

We invite you to attend the Annual Shareholders Meeting of Microsoft Corporation (“Annual Meeting”), which will be held at Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004, on November 29, 2017 at 8:00 a.m. Pacific Time. Doors open at 7:00 a.m. Microsoft Store associates will be on hand to help you experience Microsoft’s latest consumer products like the Surface Studio, Surface Laptop, and Surface Pro computers, and the Xbox console. Driving directions to Meydenbauer Center are on page 93. Parking will be validated only for the Meydenbauer Center garage. Parking is limited, so plan ahead if you are driving to the meeting.

 

The Notice of 2017 Annual Shareholders Meeting and this Proxy Statement contain details of the business to be conducted at the Annual Meeting.

Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. We urge you to promptly vote and submit your proxy via the Internet, by phone, or by signing, dating, and returning the enclosed proxy card in the enclosed envelope. If you attend the Annual Meeting, you can vote in person even if you previously submitted your proxy.

This year’s shareholder question and answer session will include both live questions and questions submitted in advance. You may submit a question in advance of the meeting at www.proxyvote.com after logging in with the control number found next to the label “Control Number” for postal mail recipients or next to the field labeled “Control Number” within the body of your email. We will respond to you by email if your online question isn’t answered during the meeting.

For those who can’t attend in person, we again are offering a virtual shareholder meeting in which you can view the meeting, submit questions, and vote online at www.microsoft.onlineshareholdermeeting.com. We will also provide a live webcast of the Annual Meeting from the Microsoft Investor Relations website at www.microsoft.com/investor. A transcript with video and audio of the entire Annual Meeting will be available on the Investor Relations website after the meeting. We hope this will allow those who cannot attend the meeting in person to hear Microsoft executives discuss the past year’s results and our future opportunities. In addition, we make available at our Investor Relations website a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find pertinent information about us.

On behalf of the Board of Directors, thank you for your continued investment in Microsoft. We look forward to greeting as many of you as possible.

Sincerely,

 

LOGO

John W. Thompson

Independent Chairman

  

LOGO

Satya Nadella

Chief Executive Officer


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October 16, 2017

 

 

 

Letter from the

Board of Directors

 

 

 

 

 

Dear Shareholder,

 

 

On behalf of the Board of Directors and management, we want to thank you for your continued investment in Microsoft. With this proxy filing, we intend to address the most recent developments at Microsoft that demonstrate our ongoing commitment to strong corporate governance.

 

 
LOGO                                                        
   

Digital transformation

 

One of the Board’s key responsibilities is overseeing strategy. At its core, Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. The Company’s strategy is to build best-in-class platforms and productivity services for an intelligent cloud and an intelligent edge infused with artificial intelligence. In this era of digital transformation, as Microsoft continues to transform its business, we work with CEO Satya Nadella and his senior leadership team to adjust plans as needed to respond to a dynamically changing environment.

       
   

 

Board oversight of corporate social responsibility

 

Microsoft’s commitment to achieving its mission extends beyond products and services. It also informs the Company’s policies and business practices, and commitment to helping address economic, social, and environmental issues around the world. Microsoft’s approach - in important areas like energy usage, data privacy, and diversity and inclusion - is always grounded in its mission and values.

 

The Regulatory and Public Policy Committee of the Board leads oversight of Microsoft’s corporate social responsibility (“CSR”). The Committee’s charter includes reviewing and providing guidance on policies and programs related to:

 

 
   

•  Human rights

•  Environmental sustainability

•  Supply chain management

 

•  Political activities & expenditures

•  Philanthropy

 
   

 

Board composition and refreshment

 

As part of our ongoing commitment to creating a balanced Board with diverse viewpoints and deep industry expertise, we regularly add new directors to infuse new ideas and fresh perspectives in the boardroom.

 

In 2017, we welcomed Reid Hoffman and Hugh Johnston to the Board. Mr. Hoffman, who joined in March, is the co-founder and former CEO of LinkedIn and a partner at Greylock Partners. Mr. Johnston, who joined in September, is Vice Chairman and Chief Financial Officer of PepsiCo. We are also pleased to announce the nominations of Penny Pritzker and Arne Sorenson for election to the Board at our November 29 Annual Meeting. Ms. Pritzker is founder and chairman of PSP Capital and the former U.S. Secretary of Commerce. Mr. Sorenson is President and Chief Executive Officer of Marriott International, Inc. All are accomplished business leaders with significant experience directly relevant to Microsoft’s strategic vision and business strategies.

 

Mason Morfit is not seeking re-election and will end his Board service in November. We thank Mr. Morfit for his many contributions.

 

Though we still have more work to do, our Board nominees continue to be more diverse than ever; seven of fourteen nominees are either female, nationally, or ethnically diverse.

 

 

 

 

ii    LOGO   


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Effective July 2017, we adopted a new board tenure policy. Since we first adopted our Corporate Governance Guidelines, it has been our intention to maintain a board with backgrounds and experiences that match the evolution of the Company. In keeping with this mindset, we adopted a board tenure policy that targets an average tenure of ten years or less for the Board’s independent directors as a group. This approach strikes a balance between retaining directors with deep knowledge of the Company while adding directors who bring a fresh perspective.

 

Incentive compensation changes

 

We know from our shareholder engagement that investors favor incentive compensation tied to specific performance measures that are aimed at driving long-term performance and value creation. In fiscal year 2017, we completed the steps described in last year’s Proxy Statement so that performance-based pay is aligned with key strategic opportunities, business results, and shareholder returns. We adopted pre-established financial metrics to formulaically determine 50% of the annual cash incentive for all executive officers; we aligned the metrics for our performance stock awards with our three strategic ambitions, reducing overlap with the annual bonus; and we reduced the maximum award levels for performance stock awards.

 

Shareholder engagement

 

We are committed to using technology to enhance our external relations and communications with our shareholders and other stakeholders. We work closely with our partners to help pioneer innovative technology solutions such as using an online platform for hosting proxy statements to deliver an interactive version through the Microsoft Investor Relations website.

 

In addition to the proxy statement and our virtual shareholder meetings, Microsoft’s director video series is another channel we offer to help shareholders understand the unique skills and perspectives that each director brings to the board. In the most recent installment, Sandra Peterson shares her thoughts on how Microsoft’s leadership is reinvigorating our Company culture, the power of cloud technology in healthcare, and how diversity in the workplace is always a smart business decision. The complete series can be viewed on our website at https://aka.ms/DirectorVideoSeries.

 

Thank you for the trust you place in us and your continued investment in our vision for the future. We appreciate the opportunity to serve Microsoft on your behalf.

 

Sincerely,

 

Your Board of Directors

 

 

 

2017 PROXY STATEMENT  iii


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LOGO

Notice of 2017 Annual Shareholders Meeting

 

Date     November 29, 2017
Time     8:00 a.m. Pacific Time
Place     Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004
Record date     September 29, 2017. 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 at 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 and extra work of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope, postage prepaid if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares at the Annual Meeting, as your proxy is revocable at your option. We are requesting your vote to:
Items of
business
   

•  Elect the 14 director nominees named in this Proxy Statement

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

•  Vote, on a non-binding advisory basis, on the frequency (i.e., every one, two, or three years) of holding the say-on-pay vote

•  Ratify the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2018

•  Approve material terms of the performance goals under the Microsoft Corporation Executive Incentive Plan

•  Approve the Microsoft Corporation 2017 Stock Plan

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

 

Virtual meeting

   

 

You also may vote at the Annual Meeting via the Internet by visiting www.microsoft.onlineshareholdermeeting.com and following the instructions.

 

Admission to
meeting
   

Proof of share ownership will be required to enter the Annual Meeting.

See Part 6 – “Information about the meeting” for details.

 

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on November 29, 2017. Our 2017 Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/investor.

 

By order of the Board of Directors

 

 

LOGO

John A. Seethoff

Secretary

Redmond, Washington

October 16, 2017

The use of cameras at the Annual Meeting is prohibited and they will not be allowed into the meeting or any other adjacent areas, except by credentialed media. We realize that many mobile phones have built-in cameras; while these phones may be brought into the venue, the camera function may not be used at any time.

 

2017 PROXY STATEMENT  v


Table of Contents

Proxy Statement table of contents

 

   

Proxy summary

     1  
  1   

 

 

 

Corporate governance
at Microsoft

 

 
 

     

Corporate governance principles and practices

     7  
        

Our corporate governance cycle promotes effective shareholder engagement

     7  
        

Annual corporate governance cycle

     7  
        

Our progressive corporate governance framework

     8  
        

We have an independent Chairman of the Board

     8  
        

Our Board is independent

     9  
        

We have independent Board committees with appropriate expertise

     9  
        

We have progressive shareholder rights

     9  
        

Our approach to risk oversight

     10  
        

Key policies ensure accountability and alignment with shareholder interests

     10  
        

Directors receive orientation and continuing education

     10  
        

Board and committees annually evaluate their effectiveness

     10  
        

Our approach to corporate social responsibility

     10  
        

Political contributions transparency

     12  
                      

How to communicate with our Board

     12  
  2   

 

 

 

Board of Directors

 

 

     

Proposal 1: Election of directors

     13  
        

Director selection and qualifications

     13  
        

We select Board members through a disciplined process

     13  
        

Board membership criteria

     14  
        

Key board qualifications, expertise, and attributes

     15  
        

Shareholder recommendations and nominations of director candidates

     16  
        

Our director nominees

     17  
        

Director independence

     24  
        

Director attendance

     24  
        

Board committees

     25  
        

Audit Committee

     25  
        

Compensation Committee

     26  
        

Governance and Nominating Committee

     27  
        

Regulatory and Public Policy Committee

     27  
        

Director compensation

     28  
        

Compensation structure for directors

     28  
        

Fiscal year 2017 director compensation

     29  
                      

Certain relationships and related transactions

     30  

 

vi    LOGO   


Table of Contents
  3   

 

 


 

Named
executive
officer
compensation

 

 
 
 
 

           

Proposal 2: Advisory vote to approve named executive officer compensation

     31  
        

Statement in support

     31  
        

Compensation discussion and analysis

     32  
        

Section 1 – Executive compensation overview

     33  
        

Shareholder feedback considered in evolution of pay program

     33  
        

Annual compensation components

     34  
        

Section 2 – Fiscal year 2017 compensation decisions

     38  
        

Business results

     38  
        

Decisions

     38  
        

Fiscal year 2017 base salaries

     38  
        

Cash incentive awards

     38  
        

Fiscal year 2017 stock awards

     42  
        

Section 3 – Fiscal year 2017 compensation design process

     43  
        

Executive compensation program design

     43  
        

Target annual compensation mix

     44  
        

Paying competitively

     44  
        

Technology labor market

     45  
        

Scope of executive roles

     45  
        

Establishing compensation opportunities

     45  
        

Independent compensation consultant

     46  
        

Section 4 – Other compensation policies and information

     46  
        

No significant executive benefits and perquisites

     46  
        

Limited post-employment compensation

     46  
        

Strong clawback policy

     47  
        

Robust stock ownership policy

     48  
        

Derivatives trading, hedging, and pledging prohibited

     48  
        

Deductibility of executive compensation

     48  
        

Annual compensation risk assessment

     49  
        

Compensation Committee report

     50  
        

Fiscal year 2017 compensation tables

     50  
        

Summary compensation table

     50  
        

Grants of plan-based awards

     52  
        

Outstanding equity awards at June 30, 2017

     53  
        

Stock vested

     54  
        

Non-qualified deferred compensation

     54  
        

Equity compensation plan information

     55  
        

Compensation Committee interlocks and insider participation

     55  
        

Stock ownership information

     55  
        

Principal shareholders

     57  
        

Section 16(a) – beneficial ownership reporting compliance

     57  
                      

Proposal 3: Advisory vote on frequency of advisory vote on executive compensation

     57  

 

2017 PROXY STATEMENT  vii


Table of Contents
  4   

 

 

 

Audit Committee
matters

 

 
 

           

Proposal 4: Ratify Deloitte & Touche LLP as independent auditor for fiscal year 2018

     58  
        

Audit Committee report

     58  
        

Charter and responsibilities

     58  
        

Fiscal year 2017 activity

     58  
        

Fiscal year 2017 financial statements

     59  
        

Independent auditor tenure and rotation

     59  
        

Independence and performance of outside audit firm

     59  
        

Recommendation of Deloitte & Touche for fiscal year 2018

     60  
        

Fees billed by Deloitte & Touche

     60  
        

Audit fees

     61  
        

Audit-related fees

     61  
        

Tax fees

     61  
        

All other fees

     61  
                    

Policy on Audit Committee pre-approval of audit and permissible non-audit services of independent auditor

     61  
  5   

 

 

 

Other management
proposals

 

 
 

     

Proposal 5: Approve material terms of the performance goals under the Microsoft Corporation Executive Incentive Plan

     62  
        

Code section 162(m) approval

     62  
        

Description of the Incentive Plan

     63  
        

Federal income tax consequences

     65  
        

New plan benefits

     65  
        

Proposal 6: Approve the Microsoft Corporation 2017 Stock Plan

     66  
        

Burn rate and overhang

     67  
        

Description of the 2017 Stock Plan

     69  
        

Federal income tax consequences

     73  
                      

New plan benefits

     75  
  6   

 

 

 

Information about
the meeting

 

 
 

     

Proxy materials are available on the Internet

     76  
        

Proof of ownership required for attending meeting in person

     76  
        

Participating in electronic meeting

     76  
        

Soliciting proxies

     77  
        

Householding

     77  
        

Election of directors

     77  
        

Voting procedures

     77  
        

Tabulation of votes

     77  
        

Majority vote standard for election of directors

     77  
        

Vote required; effect of abstentions and broker non-votes

     78  
        

Vote confidentiality

     78  
        

Where to find more proxy voting information

     79  
        

Where to find our corporate governance documents

     79  
        

Proposals by shareholders for 2018 annual meeting

     79  
                    

Other business

     80  

Annex A — Reconciliation of non-GAAP and GAAP financial measures

     81  

Annex B — Microsoft Corporation Executive Incentive Plan

     82  

Annex C — Microsoft Corporation 2017 Stock Plan

     86  

Downtown Bellevue driving directions and parking

     93  

 

viii    LOGO   


Table of Contents

Proxy summary

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

 

 

Annual

Shareholders

Meeting

         

 

Record date

 

September 29, 2017

 

Mailing date

 

This Proxy Statement was first mailed to shareholders on or about October 16, 2017.

 

 

 

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.

 

Voting

 

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

 

 

LOGO

                                       
   Date    November 29, 2017

 

Time    8:00 a.m. Pacific Time

 

Place   Meydenbauer Center

             11100NE 6th Street

             Bellevue,Washington

             98004

 

     

 

 

Voting matters and vote recommendations

 

Proposal

 

Board

recommends

 

Reasons for

recommendation

 

See

page

  1.   Election of 14 directors  

LOGO

FOR

 

The Board and its Governance and Nominating Committee believe the 14 Board nominees possess the skills, experience, and diversity to effectively monitor performance, provide oversight, and advise management on the Company’s long-term strategy.

 

  13
2.   Advisory vote on executive compensation “say-on-pay”  

LOGO

FOR

 

Our executive compensation programs demonstrate the evolution of our pay for performance philosophy, and reflect the input of shareholders from our extensive outreach efforts.

 

  31
3.  

Advisory vote on the frequency of future advisory votes on executive compensation

 

 

LOGO

FOR EVERY

YEAR

  We believe there is a broad investor consensus favoring an annual say-on-pay vote, and an annual vote best promotes accountability and transparency for our executive compensation program.   57
4.  

Ratification of the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2018

 

 

LOGO

FOR

  Based on the Audit Committee’s assessment of Deloitte & Touche’s qualifications and performance, it believes their retention for fiscal year 2018 is in the best interests of the Company.   58
5.   Approve material terms of the performance goals under the Microsoft Corporation Executive Incentive Plan  

LOGO

FOR

 

Shareholders must approve these material terms at least every five years so certain pay to executive officers is eligible to be deducted for federal income tax purposes. Being able to award pay that may be deductible is in the best interests of the Company.

 

  62
6.   Approve the Microsoft Corporation 2017 Stock Plan  

 

LOGO

FOR

  Approving the Microsoft Corporation 2017 Stock Plan allows us to continue to award equity compensation, which incentivizes a long-term perspective on the Company’s business and creates strong alignment with shareholders.   66

 

 

Vote in

advance of

the meeting

  LOGO  

 

Vote your shares at www.proxyvote.com.

Have your Notice of Internet Availability or proxy card in hand for the 12-digit control number needed to vote.

 

 

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

 

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

 

   

 

LOGO

                              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOGO

   
   

 

LOGO

                    

   
       

 

 

Vote in

person at

the meeting

 

 

 

 

LOGO

 

 

See Part 6 – “Information about the meeting” for details on admission requirements to attend the Annual Meeting.

 

   
LOGO       
    
                    
     
 

 

    
    
    
    
    
    
    

 

    
                

   
 

 

2017 PROXY STATEMENT  1


Table of Contents

 

Our director nominees

See Part 2 – “Board of Directors” for more information.

The following table provides summary information about each director nominee. Each director is elected annually by a majority of votes cast.

 

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

  61   1981   No   1        

Reid G. Hoffman

Partner, Greylock Partners

  50   2017   Yes   0        

LOGO

Hugh F. Johnston

Vice Chairman and CFO, PepsiCo, Inc.

  56   2017   Yes   0  

LOGO

     

Teri L. List-Stoll

Executive Vice President and CFO, Gap, Inc.

  54   2014   Yes   1  

LOGO

   

LOGO

 

Satya Nadella

CEO, Microsoft Corporation

  50   2014   No   1        

Charles H. Noski

Former Vice Chairman,

Bank of America Corporation

  65   2003   Yes   2  

LOGO

 

LOGO

   

LOGO

 

Helmut Panke Ph. D.

Former Chairman of the Board of Management,

BMW Bayerische Motoren Werke AG

  71   2003   Yes   1  

LOGO

     

LOGO

Sandra E. Peterson

Group Worldwide Chair,

Johnson & Johnson

  58   2015   Yes   0    

LOGO

   

LOGO

Penny S. Pritzker

Chairman, PSP Capital Partners, LLC

  58   New

Nominee

  Yes   0        

Charles W. Scharf

CEO, The Bank of New York Mellon Corporation

  52   2014   Yes   1    

LOGO

 

LOGO

 

Arne M. Sorenson

President and CEO, Marriott International, Inc.

  58   New
Nominee
  Yes   1        

John W. Stanton

Chairman, Trilogy Partnerships

  62   2014   Yes   2    

LOGO

   

LOGO

John W. Thompson

Independent Chairman, Microsoft Corporation;

Former CEO, Virtual Instruments, Inc.

  68   2012   Yes   1      

LOGO

 

 

LOGO

Padmasree Warrior

CEO, NIO USA, Inc.

  56   2015   Yes   0    

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

Mason Morfit will not seek re-election at the 2017 Annual Meeting. Mr. Morfit currently serves on the Audit Committee and Compensation Committee. Penny Pritzker and Arne Sorenson are both nominated for election to the Board at the Annual Meeting. The Board will consider committee appointments for Ms. Pritzker and Mr. Sorenson once elected to the Board.

 

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Corporate governance highlights

See Part 1 – “Corporate governance at Microsoft” for more information.

 

 

Our director nominees

LOGO   LOGO   LOGO

 

 

Independent Board and Board committees 

 

   

 

LOGO

                                             
  

•  Independent Chairman of the Board; Chairman and CEO positions separate since 2000

 

•  12 of 14 director nominees are independent

 

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

 

•  All committee members are independent

 

•  Independent directors meet in executive session at least quarterly

 

•  Regular committee executive sessions of independent directors – At each regularly scheduled meeting, the Audit Committee, Compensation Committee, and Regulatory and Public Policy Committee meet in executive session. Additional sessions of all Board committees are held as needed.

 

•  We conduct annual board and committee evaluations

 

•  We have robust director orientation and continuing education programs for directors

 

•  All Audit Committee members are financially literate and four are audit committee financial experts

 

•  Our Compensation Committee uses an independent compensation consultant

 

 

 

Progressive shareholder rights 

 

   
LOGO                                              
  

•  Directors are elected by majority vote in uncontested elections

 

•  All directors are elected annually

 

•  Our bylaws provide for proxy access by shareholders

 

 

•  15% of outstanding shares can call a special meeting

 

•  We have a confidential voting policy

 

 

 

Strong shareholder support on say-on-pay 

 

   
LOGO                                              
  

96% say-on-pay support at our 2016 Annual Meeting. Our compensation Committee believes the vote indicates support for our program, including enhancements made over the past three years.

 

 

 

 

Active shareholder  engagement

 

   
LOGO                                              
  

During fiscal year 2017, independent members of our Board and members of senior management conducted outreach to a cross-section of shareholders owning almost 45% of our shares.

 

 

 

2017 PROXY STATEMENT  3


Table of Contents

 

Executive compensation matters

See Part 3 – “Named executive officer compensation” for more information.

 

 

Our business performance

Executing on our three ambitions

In fiscal year 2017, we combined strong business execution with our ongoing business transformation. We achieved rapid growth in key business lines, completed the acquisition of LinkedIn, and realigned our organization to invest in areas we expect to yield the highest long-term growth. Advancing our world view of an intelligent cloud and an intelligent edge, we enhanced our collection of products and services our consumers love and built on our position as a trusted partner to businesses, enabling their own digital transformations using our key assets such as the cloud, productivity tools, and artificial intelligence.

 

 

Our ambitions and achievements*

 

 

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*    Financial results for fiscal year 2017 have not been adjusted to reflect adoption of the new accounting standards for revenue recognition and leases effective July 1, 2017. All growth comparisons relate to the corresponding period in the prior year.

**  Commercial cloud annualized revenue run rate is calculated by multiplying revenue for the last month of the quarter by twelve for Office 365 commercial, Azure, Dynamics 365, and other cloud properties.

Financial results for fiscal year 2017

We exhibited financial discipline while investing in growth opportunities and innovation, with the following financial results.

 

    

 

GAAP

  

 

non-GAAP*

 

Revenue

 

  

 

$90.0 billion (up 5%)

 

  

 

$96.7 billion (up 5%)

 

 

Operating income

 

  

 

$22.3 billion (up 11%)

 

  

 

$29.3 billion (up 5%)

 

 

Net income

 

  

 

$21.2 billion (up 26%)

 

  

 

$25.9 billion (up 16%)

 

 

Diluted earnings per share

 

  

 

$2.71 (up 29%)

 

  

 

$3.31 (up 19%)

 

 

One-year total shareholder return

 

  

 

38.0%

 

 

  * See Annex A for a reconciliation of non-GAAP and GAAP financial measures. Percentages are year-over-year.

 

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Strong long-term performance

Our total shareholder return and total cash returned to shareholders for the past three years have been strong.

 

 

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  * Total shareholder return includes reinvestment of dividends.

 

 

Executive compensation advisory vote

Our Board of Directors recommends that shareholders vote to approve, on an advisory basis, the compensation paid to the Company’s named executive officers as described in this Proxy Statement (the “say-on-pay” vote), for the following reasons.

 

 

Pay for

performance

 

                                   
LOGO                                                                                                                                                  
   We completed the evolution of executive compensation.

•We extended the structured framework for the annual cash incentive to all executive officers and adopted pre- established financial metrics to formulaically determine 50% of the annual cash incentive.

 

•The metrics for our performance stock awards align with our three strategic ambitions, and were revised to reduce overlap with the annual cash incentive and drive long- term growth.

 

•We also reduced the maximum award levels for performance stock awards.

 

  

Fiscal year 2017 executive compensation.

At least 70% of target compensation for our named executive officers was equity-based, providing direct alignment with returns to shareholders and incentives to drive long-term business success. The annual cash incentive awards for our named executive officers ranged from 151.66% to 170.00% of target consistent with our strong business performance and returns to shareholders and their effective leadership. Their annual cash incentive was determined 50% under formulaic, pre-established financial metrics and 50% based on performance across three categories as described in greater detail in Part 3 – “Named executive officer compensation.”

 

 

 

 

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Sound program design

 

 

   

LOGO

 

                                 
  

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 interests of long-term shareholders. We achieve our objectives through compensation that:

 

LOGO   Provides a competitive total pay opportunity,

 

LOGO   Consists primarily of stock-based compensation,

 

LOGO   Delivers a majority of pay based on performance,

 

LOGO   Enhances retention through multi-year vesting of stock awards, and

 

LOGO    Does not encourage unnecessary and excessive risk taking.

 

 

Best practices in executive compensation

 

 

    
LOGO                                           
  

Our leading practices include:

 

LOGO    A strong clawback policy,

 

LOGO    An executive stock ownership policy,

 

LOGO    A policy prohibiting pledging and hedging ownership of Microsoft stock,

 

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

 

LOGO    No employment contracts or change in control benefits, and

 

LOGO    No executive-only retirement programs.

 

 

 

 

 

 

 

Note about

forward-looking statements

 

   
LOGO                                                 
  

This Proxy Statement includes estimates, projections and 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 this Proxy Summary and Part 3 – “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 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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1. Corporate governance at Microsoft

 

 

Corporate governance principles and practices

Our corporate governance cycle promotes effective shareholder engagement – Microsoft believes effective corporate governance includes regular, constructive conversations with our shareholders. We actively engage with our shareholders as part of our annual corporate governance cycle.

 

LOGO

We are transparent – Communicating governance policies and practices to all shareholders and other stakeholders is an important part of our commitment to transparency. With over 4.2 million Microsoft shareholders, we use both direct dialogue and ‘one-to-many’ communications to reach all our shareholders.

We proactively engage with our shareholders – During fiscal year 2017, our independent Chairman, Compensation Committee Chair, and members of senior management engaged with a cross-section of shareholders owning almost 45% of our shares. Our CEO, Satya Nadella, remains committed to investing time with our shareholders to maintain transparency and better understand their perspectives, including by participating in our quarterly earnings calls and other forums.

Our director video series provides all stakeholders insight about our Board – We recently released a new installment of our director video series featuring an interview with Sandra Peterson. The videos provide an informal opportunity for our directors to discuss their own approaches to their role. The complete series can be viewed on our website at https://aka.ms/DirectorVideoSeries.

Microsoft on the Issues blog posts address our views on emerging governance topics – We regularly post policy blogs on Microsoft on the Issues, covering topics ranging from the latest in corporate governance and corporate social responsibility to privacy, cybersecurity, online safety, jobs, and education. We broadcast information posted on the Microsoft on the Issues blog via social media handles, including @MSFTIssues and @MSFTNews.

 

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Our Investor Relations website delivers extensive content about governance and corporate social responsibility – Our Investor Relations website provides in-depth information about our corporate governance and corporate social responsibility initiatives.

 

Our progressive corporate governance framework

 

 

Corporate governance at Microsoft is designed to promote the long-term interests of our shareholders, maintain internal checks and balances, strengthen management accountability, inspire public trust, and foster responsible decision making and accountability.

 

Our corporate governance framework is designed to ensure our Board of Directors has the necessary 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 meet or exceed the requirements of the NASDAQ Stock Market (“NASDAQ”) and applicable law. This framework establishes the practices our Board follows for:

 

•  Board composition, director selection, and director compensation

 

•  Board refreshment and succession planning

 

•  Independent Board leadership

 

•  Board meetings and involvement of senior management

 

•  CEO performance evaluation

 

  

•  CEO and senior executive development and succession planning

 

•  Board committees

 

•  Board and committee evaluations

 

•  Shareholder engagement

 

•  Risk oversight

 

     Our corporate governance documents

 

         LOGO    Amended and Restated Articles of Incorporation

         LOGO    Bylaws

         LOGO    Corporate Governance Guidelines

         LOGO    Director Independence Guidelines

         LOGO    Microsoft Finance Code of Professional Conduct

         LOGO    Microsoft Standards of Business Conduct

         LOGO    Audit Committee Charter and Responsibilities Calendar

 

 

   LOGO    Compensation Committee Charter

   LOGO    Governance and Nominating Committee Charter

   LOGO    Regulatory and Public Policy Committee Charter

   LOGO    Executive Stock Ownership Policy

   LOGO    Executive Compensation Recovery Policy

   LOGO    Compensation Consultant Independence Standards

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

We have an independent Chairman of the Board

The roles of chairman and CEO have been separate since 2000. The independent members of the Board annually appoint our Chairman. John Thompson currently serves as independent Chairman of the Board. Key responsibilities of the Chairman include:

 

  Calling meetings of the Board and independent directors

 

  Setting the agenda for Board meetings in consultation with the CEO and corporate secretary

 

  Chairing executive sessions of the independent directors

 

  Leading the full Board in the annual CEO performance evaluation

 

  Engaging with shareholders

 

  Acting as an advisor to Mr. Nadella on strategic aspects of the CEO role with regular consultations on major developments and decisions likely to interest the Board

 

  Performing the other duties specified in the Corporate Governance Guidelines or assigned by the Board

 

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Our Board believes its leadership structure is appropriate because it effectively allocates authority, responsibility, and oversight between management and the independent members of our Board. Our CEO has primary responsibility for the operational leadership and strategic direction of the Company while the Chairman facilitates our Board’s independent oversight of management, promotes communication between management and our Board, engages with shareholders, and leads our Board’s consideration of key governance matters.

Our Board is independent

 

  12 of 14 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 directors are independent.

 

  Board tenure limits – 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 ten years or less for its independent directors as a group.

 

  Quarterly executive sessions of independent directors – At each quarterly Board meeting, the independent directors meet in executive session without Company management present. Additional executive sessions are held as needed.

 

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

We have independent Board committees with appropriate expertise

 

  Committees are independent – Only independent directors are members of the Board’s committees.

 

  Regular committee executive sessions of independent directors – At each regularly scheduled meeting, members of the Audit Committee, Compensation Committee, and Regulatory and Public Policy Committee meet in executive session. Additional executive sessions of all Board committees are held as needed.

 

  Audit Committee members have financial sophistication and expertise – All members of the Audit Committee meet the NASDAQ listing standard of financial sophistication. Ms. List-Stoll, Messrs. Johnston and Noski, and Dr. Panke are “audit committee financial experts” under Securities and Exchange Commission (“SEC”) rules.

 

We have progressive shareholder rights

 

•   Majority voting – In an uncontested election, directors are elected by the majority of

votes cast.

 

   Annual elections – All directors are elected annually. Microsoft does not have a

classified board.

 

•   Proxy access – We have a “Proxy Access for Director Nominations” bylaw that permits

eligible shareholders to nominate candidates for election to the Microsoft Board.

Proxy access candidates will be included in the Company’s proxy statement and ballot.

 

•   Confidential voting – We have a confidential voting policy to protect the voting privacy

of our individual shareholders.

 

•   Special meetings – Holders of 15% of outstanding shares can call a special meeting.

 

 

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Our approach to risk oversight

The Board directly oversees strategic risks to the Company and other risk areas not delegated to one of its committees.

 

 

Audit

Committee

     

 

 

Compensation

Committee

     

 

Regulatory and Public

Policy Committee

Reviews and assesses the Company’s processes to manage financial reporting risk and to manage investment, tax, and other financial risks. It also reviews the Company’s policies for risk assessment and steps management has taken to control significant risks, except those delegated by the Board to other committees.

 

   

Oversees compensation programs and policies and their effect on risk-taking by management.

   

Oversees risks related to competition and antitrust, data privacy and cybersecurity, and workforce and immigration laws and regulations.

Management periodically reports to the Board or relevant committee, which provide guidance on risk assessment and mitigation. Each committee charged with risk oversight reports to the Board on those matters. This approach to risk oversight does not affect the Board’s leadership structure.

Key policies ensure accountability and alignment with shareholder interests

 

  Stock ownership requirements – We have stock ownership policies for directors, executive officers, and other senior executives to promote a long-term perspective in managing the enterprise and to help align the interests of our shareholders, executives, and directors.

 

  Compensation clawback – We have a strong ‘no-fault’ executive compensation recovery policy that applies to executive officers, other senior leaders and our principal accounting officer.

 

  Hedging and pledging prohibited – We prohibit our directors and executive officers from 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.

Directors receive orientation and continuing education

 

  Director orientation – Our robust orientation program familiarizes new directors with Microsoft’s businesses, strategies, and policies, and assists new directors in developing company and industry knowledge to optimize their service on the Board.

 

  Continuing education – Regular continuing education programs enhance the skills and knowledge directors use to perform their responsibilities. These programs may include internally developed materials and presentations, programs presented by third parties, and financial and administrative support to attend qualifying academic or other independent programs.

Board and committees annually evaluate their effectiveness

 

  Board evaluation – The Governance and Nominating Committee annually evaluates the performance of the Board and each of its members. 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.

 

  Committee evaluations – Each committee annually evaluates its performance and reports the results to the Board. 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.

Our approach to corporate social responsibility

At Microsoft, we work to conduct our business in ways that are principled, transparent, and accountable to key stakeholders. We believe doing so generates long-term value for our business, our shareholders, and society. The Regulatory and Public Policy Committee of the Board plays an important role in overseeing these initiatives.

To help focus our efforts, we use a corporate social responsibility (“CSR”) materiality assessment to prioritize the issues where we can have the most impact on our business and society. The assessment helps ensure our CSR priorities reflect feedback from our customers and shareholders; guidance from policymakers and regulators; insights into emerging risks and opportunities from external experts; and other stakeholder input. Three areas of particular importance in 2017 were trust, sustainability, and culture.

 

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Trust – We seek to engage thoughtfully and responsibly in public policy discussions. Satya Nadella and Brad Smith, our President and Chief Legal Officer, have publicly articulated the business and societal imperative of fostering a culture of accessibility and global diversity and inclusion. In A Cloud for Global Good we outlined a clear vision for the steps that governments and technology companies can take to ensure technology is developed and used in a way that is trusted, responsible, and inclusive.

Trust has emerged as one of the most important issues for our business. People won’t use technology they don’t trust. To ensure our customers can trust the Microsoft products and services they use, we’ve published clear privacy principles and are committed to implementing a strong privacy, security, compliance, and transparency framework across all of our services. The value in these commitments extends beyond thoughtfully managing risk by creating new business opportunities for us. As one example, Microsoft was the first global cloud services provider to publicly offer contractual commitments that allow our customers to meet the European Union’s upcoming General Data Protection Regulation (“GDPR”). Beginning in May 2018, GDPR will require that organizations serving European customers follow new privacy and security requirements. Microsoft’s expertise protecting data, championing privacy, and complying with complex regulations is manifested in our new contractual commitments to ensure our cloud services comply with GDPR – presenting new opportunities to offer value to customers while advancing our corporate values.

 

Sustainability – With the dramatic growth in cloud computing and with the world’s attention increasingly focused on addressing climate change, energy use and its relationship to climate change is an important area for us. We set our first carbon reduction goal nearly a decade ago; our operations globally have been carbon neutral since mid-2012 including both the datacenters we own and lease. In 2016, we publicly announced goals to boost the percentage of wind, solar, and hydroelectricity powering our datacenters from 44% to greater than 50% by the end of 2018, and more than 60% early in the next decade, with further improvements thereafter. We work closely with many public and private Microsoft customers and partners to apply the power of cloud computing to reduce their energy use and carbon emissions and enhance organizational resiliency in the face of a changing climate. We also are working to ensure our own business resiliency. This year Microsoft completed its first Climate Risk Vulnerability Assessment focused on potential climate-related impacts to Microsoft datacenters and other facilities including: heat, drought, sea-level rise, flood and heavy-rain intensity, and direct (on-site) and indirect (off-site) risks. We then incorporated consideration and management of these risks into our enterprise risk management system.    

LOGO

*Since 2012

Culture – Satya Nadella is intently focused on creating a culture that allows people to do their best work. Microsoft’s senior leaders have promoted a growth mindset culture, encouraging employees throughout the organization to become learners in all things. We then apply that mindset to learning about our customers, being diverse and inclusive, working together as one, and – ultimately – making a difference in the world. We’ve worked to support this learning culture through shifts in how we measure and reward performance, new communications channels to gain employee feedback, and new opportunities like the Microsoft Hackathon for Microsoft employees to work together to make a difference at work and in the world. As just one example, a Hackathon project inspired Microsoft to include built-in eye tracking support as part of Windows 10 that allows people with disabilities to use a compatible eye tracker to operate an on-screen mouse, keyboard and text-to-speech experience using only their eyes.

At http://www.microsoft.com/csr we share a broad array of information on our policies, practices, and performance across these areas and others, ranging from our carbon footprint to how we’ve responded to requests from law enforcement agencies for customer data. Our goal is to meet the high standards we have for ourselves and to consistently earn the trust and confidence of the public and our customers, partners, employees, and shareholders.

 

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Political contributions transparency

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 Principles and Policies Guiding Microsoft Participation in Public Policy Process in the United States, which focus on ensuring compliance with applicable federal and state laws and go beyond compliance to implement what we consider leading practices in corporate accountability, transparency, integrity, and responsibility. The policy is available at www.microsoft.com/politicalengagement.

 

 

How to communicate with our Board

Shareholders may contact the Board about corporate governance or matters related to the Board. Communications about these topics will be received and processed by management before being forwarded to the 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 https://www.microsoft.com/en-us/legal/compliance/integrity.

 

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2. Board of Directors

 

 

Proposal 1:

Election of directors

 

 

 

 

The Board has nominated 14 directors for election at the Annual Meeting to hold office until the 2018 Annual Meeting. Mason Morfit is not seeking re-election and his Board service will end on the date of the Annual Meeting. The Board has nominated as new directors for election Penny Pritzker and Arne Sorenson; if elected, their terms will begin on November 29, 2017. The Board has authorized increasing its size to 14 members coincident with their election. The Governance and Nominating Committee evaluated and recommended the nominees in accordance with its charter and our Corporate Governance Guidelines. You can also view our video series featuring members of our Board at www.microsoft.com/investor/board.

 

To be elected, a director must receive a vote of the majority of the votes cast.

 

   
   

 

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Our Board of Directors recommends a vote FOR the election to the Board of each of the nominees listed below.

 

 

Name

 

  

 

Age

 

  

 

Director
since

 

  

 

Occupation

 

William H. Gates III

   61    1981    Co-Chair and Trustee, Bill & Melinda Gates Foundation

Reid G. Hoffman

   50    2017    Partner, Greylock Partners

Hugh F. Johnston

   56    2017    Vice Chairman and CFO, PepsiCo, Inc.

Teri L. List-Stoll

   54    2014    Executive Vice President and CFO, Gap, Inc.

Satya Nadella

   50    2014    CEO, Microsoft Corporation

Charles H. Noski

   65    2003    Former Vice Chairman, Bank of America Corporation

Helmut Panke

   71    2003   

Former Chairman of the Board of Management,

BMW Bayerische Motoren Werke AG

Sandra E. Peterson

   58    2015    Group Worldwide Chair, Johnson & Johnson

Penny S. Pritzker

   58    New Nominee    Chairman, PSP Capital Partners, LLC

Charles W. Scharf

   52    2014    CEO, The Bank of New York Mellon Corporation

Arne M. Sorenson

   58    New Nominee    President and CEO, Marriott International, Inc.

John W. Stanton

   62    2014    Chairman, Trilogy Partnerships

John W. Thompson

   68    2012    Independent Chairman, Microsoft Corporation; Former CEO, Virtual Instruments, Inc.

Padmasree Warrior

   56    2015    CEO, NIO USA, Inc.

 

 

Director selection and qualifications

We select Board members through a disciplined process

Shareholders elect all Board members annually. The Governance and Nominating Committee recommends to the Board director candidates for nomination and election at the annual shareholders meeting or for appointment to fill vacancies. The Committee annually reviews with the Board the skills and characteristics required of Board nominees, considering current Board composition and Company circumstances. 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.

 

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Board membership criteria

The Governance and Nominating Committee works with our Board to determine the characteristics, skills, and experiences for the Board as a whole and its individual members with the objective of having a Board with diverse backgrounds and experience. Characteristics expected of all directors include

 

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In evaluating the suitability of individual Board members, our Board considers many factors, including 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. The Board’s objective is to recommend a group 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 Board does not believe that directors should expect to be re-nominated annually. In determining whether to recommend a director for re-election, the Governance and Nominating Committee considers the director’s participation in and contributions to the activities of the Board, the results of the most recent Board evaluation, and past attendance at meetings.

The Governance and Nominating 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 at the annual meeting, and

 

  assessing the Committee’s own performance.

The Governance and Nominating Committee works with the full Board to regularly evaluate Board composition to assess the skills and capabilities that are relevant to the Board’s work and the Company’s strategy, whether directors should be added in view of director departures, and the number of directors needed to fulfill the Board’s responsibilities under the Corporate Governance Guidelines and committee charters.

Shareholders previously elected all current Board members except Messrs. Hoffman and Johnston. Mr. Hoffman was considered by the Governance and Nominating Committee based on his former role as Chairman of LinkedIn Corporation. In recruiting Messrs. Johnston and Sorenson, the Committee retained the search firm Spencer Stuart to help identify director prospects, perform candidate outreach, assist in reference checks, and provide other related services. An independent director and a member of management recommended Ms. Pritzker as a candidate for consideration by the Committee. The recruiting process typically involves either the 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 prospect. A background check is completed before a final recommendation is made to the Board to appoint a candidate to the Board.

 

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Key board qualifications, expertise, and attributes

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. Director biographies below describe each director’s background and relevant experience in more detail.

 

Definitions of director qualifications

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.

Gender, ethnic, national,

or other 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.

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.

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.

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.

Public company board

service and governance

  Service on a public company board to develop insights about maintaining board and management accountability, protecting shareholder interests, and observing appropriate governance practices.

Sales and marketing

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

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.

 

 

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Experience, expertise, or attributes Gates Hoffman Johnston List-Stoll Nadella Noski Panke Peterson Pritzker Scharf Sorenson Stanton Thompson Warrior Financial Gender, ethnic, national, or other diversity Global business Leadership Mergers and acquisitions Public company board service and governance Sales and marketing Technology

 

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Nominees

 

 

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    LOGO  

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

As described in Part 1 – “Corporate governance at Microsoft – Shareholder rights,” 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.

 

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Our director nominees

 

LOGO    

 

       Age: 61

       Director since: 1981

       Birthplace: United States

 

 

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    

 

       Age: 50

       Director since: 2017

       Birthplace: United States

       INDEPENDENT

 

 

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Experience:

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

   Partner (2009-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:

   Regulatory and Public Policy

 

Other public company directorships:

   None

 

Former public company directorships
held in the past five years:

   LinkedIn Corporation

   Zynga Inc.

 

 

 

 

 
 

 

LOGO

 

2017 PROXY STATEMENT  17


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LOGO

 

LOGO  

 

       Age: 56

       Director since: 2017

       Birthplace: United States

       INDEPENDENT

 

 

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    

 

       Age: 54

       Director since: 2014

       Birthplace: United States

       INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

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:

   Trustee, Financial Accounting Foundation

   Practice Fellow, Financial Accounting Standards Board

 

 
 

 

 

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LOGO

 

LOGO    

 

       Age: 50

       Director since: 2014

       Birthplace: India

 

 

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:

   Riverbed Technology, Inc.

 

 

 

 

 

 
LOGO    

 

       Age: 65

       Director since: 2003

       Birthplace: United States

       INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

Bank of America Corporation (2010-2012) (banking and financial services company)

   Vice Chairman (2011-2012)

   Executive Vice President and Chief Financial Officer (2010-2011)

 

Northrop Grumman Corporation (2002-2005)

   Corporate Vice President and Chief Financial Officer (2003-2005)

   Director (2002-2005)

 

AT&T (1999-2002)

   Vice Chairman of the Board (2002)

   Senior Executive Vice President and Chief Financial Officer (1999-2002)

 

Hughes Electronics Corporation (1990-1999)

   President, Chief Operating Officer and Director (1997-1999)

   Vice Chairman, Chief Financial Officer and Director (1996-1997)

 

Microsoft committees:

   Audit (Chair)

   Governance and Nominating

 

Other public company directorships:

   Avon Products, Inc.

   The Priceline Group Inc.

 

Former public company directorships
held in the past five years:

   Avery Dennison Corporation

 

Other positions:

   Chairman of the Board of Trustees, Financial Accounting Foundation

   Director, National Association of Corporate Directors

   Past member, Standing Advisory Group of the PCAOB

 

 

 

 

 
 

 

 

LOGO

 

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LOGO

 

LOGO    

 

       Age: 71

       Director since: 2003

       Birthplace: Germany

       INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

BMW Bayerische Motoren Werke AG and affiliates (1982-2006) (automobile manufacturer)

   Chairman of the Board of Management (2002-2006)

   Board of Management for Finance
(1999-2002)

   Board of Management for Human Resources and Information Technology (1996-1999)

 

Microsoft committees:

   Audit

   Regulatory and Public Policy (Chair)

 

Other public company directorships:

   Singapore Airlines Limited

 

Former public company directorships
held in the past five years:

   Bayer AG (supervisory board)

   UBS AG

 

 

 

 
LOGO  

 

       Age: 58

       Director since: 2015

       Birthplace: United States

       INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

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

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

 

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

 

 

 

 
 

 

 

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LOGO

 

LOGO    

 

 

      Age: 58

      Director since: New

      Nominee

      Birthplace: United States

      INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

United States Secretary of Commerce (2013-2017)

 

PSP Capital Partners, LLC (present) (private investment firm)

   Founder and Chairman (present)

 

Pritzker Realty Group (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:

•   Appointment will be made after election

 

Other public company directorships:

   None

 

Former public company directorships held in the past five years:

   Hyatt Hotels Corporation

 

Other positions:

   Co-founder, Pritzker Traubert Family Foundation

 

 

 

 

 

 

 

 

 
LOGO    

 

      Age: 52

      Director since: 2014

      Birthplace: United States

      INDEPENDENT

 

 

LOGO

  

 

LOGO

Experience:

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

   Chief Executive Officer and Director (2017-present)

 

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:

   The Bank of New York Mellon Corporation

 

Former public company directorships held in the past five years:

   Visa Inc.

 

 

 

 

 

 
 

 

LOGO

 

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LOGO

 

 

LOGO    

 

       Age: 58

       Director since: New        Nominee

       Birthplace: Japan

       INDEPENDENT

 

 

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:

   Appointment will be made after election

 

Other public company directorships:

   Marriott International, Inc.

 

Former public company directorships
held in the past five years:

   Wal-Mart Stores, Inc.

 

Other positions:

•   Director, Brand USA

 

 

 

 
LOGO    

 

       Age: 62

       Director since: 2014

       Birthplace: United States

       INDEPENDENT

 

 

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:

   Clearwire Corp.

   Columbia Sportswear Company

 

Other positions:

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

 

 
 

 

 

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LOGO

 

LOGO  

 

      Age: 68

      Director since: 2012

      Birthplace: United States

      INDEPENDENT

 

 

LOGO

 

  

 

LOGO

Experience:

Microsoft Corporation (2014 to present)

•     Non-executive Chairman of the Board

 

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:

•     United Parcel Service

 

Other positions:

•     Executive Advisor, Riverwood Capital

 

 

 

  
LOGO  

 

      Age: 56

      Director since: 2015

      Birthplace: India

      INDEPENDENT

 

 

  

LOGO

  

 

LOGO

Experience:

NIO USA, Inc. (2015-present) (electric autonomous automobile manufacturer)

•  Chief Executive Officer and Director (2015-present)

 

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:

•  None

 

Former public company directorships
held in the past five years:

•  Box, Inc.

•  Gap, Inc.

 

 

 

 

 

  
 

 

LOGO

 

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LOGO

 

 

 

Director independence

Having an independent board is a core element of our governance philosophy. Our Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. 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 exceed the independence requirements of NASDAQ. 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 the 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 ten 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 determined that Mmes. List-Stoll, Peterson, Pritzker, and Warrior, Messrs. Hoffman, Johnston, Morfit, 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.

 

 

Director attendance

Our Board of Directors holds regularly scheduled quarterly meetings. Committee meetings occur the day before the Board meeting. Once each year, the committee and Board meetings occur on a single day so the evening and following day can be devoted to the Board’s annual strategy retreat, which includes presentations and discussions with senior management about Microsoft’s long-term strategy. Besides the quarterly meetings, typically there are two other regularly scheduled 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 six times during fiscal year 2017.

Each director nominee who is a current director attended at least 75% of the aggregate of all fiscal year 2017 meetings of the Board and each committee on which he or she served.

Directors are expected to attend the annual shareholder meeting, if practicable. All directors attended the 2016 Annual Meeting except Mr. Gates, who was unable to attend.

 

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Board committees

Our Board has four standing committees: An Audit Committee, a Compensation Committee, a Governance and Nominating Committee, and a Regulatory and Public Policy Committee. Each committee has a charter, which can be found on our website at http://aka.ms/committees. The table below provides current membership for each Board committee, followed by a description of each committee’s responsibilities.

Committees of the Board of Directors

 

Director

 

  

Audit

 

    

Compensation

 

    

 

Governance and
Nominating

 

    

 

Regulatory and  

Public Policy

 

 

 

William H. Gates III

                 

 

 

Reid G. Hoffman

                 

 

 

Member

 

 

Hugh F. Johnston

  

 

 

Member

              

 

 

Teri L. List-Stoll

  

 

 

Member

         

 

 

Member

    

 

 

G. Mason Morfit*

  

 

 

Member

    

 

 

Member

         

 

 

Satya Nadella

                 

 

 

Charles H. Noski

  

 

 

Chair

         

 

 

Member

    

 

 

Helmut Panke

  

 

 

Member

              

 

 

Chair

 

 

Sandra E. Peterson

       

 

 

Member

         

 

 

Member

 

 

Charles W. Scharf

       

 

 

Member

    

 

 

Member

    

 

 

John W. Stanton

       

 

Chair

         

 

 

Member

 

 

John W. Thompson

            

 

Chair

    

 

Member

 

 

Padmasree Warrior

       

 

 

Member

         

 

 

Number of meetings in fiscal year 2017

  

 

 

9

    

 

 

6

    

 

 

6

    

 

 

3

* Mason Morfit will not seek re-election at the 2017 Annual Meeting. Mr. Morfit currently serves on the Audit Committee and Compensation Committee. Penny Pritzker and Arne Sorenson are both nominated for election to the Board at the Annual Meeting. The Board will consider committee appointments for Ms. Pritzker and Mr. Sorenson following election to the Board.

Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its responsibilities. Below is a description of each committee’s responsibilities.

 

 

Audit Committee

 

The Audit Committee assists our Board of Directors in overseeing the quality and integrity of our accounting, auditing, and reporting practices. The Audit Committee’s role includes:

 

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

 

•  Overseeing internal auditing processes

 

•  Inquiring about significant risks, reviewing our policies for enterprise risk assessment and risk management, and assessing the steps management has taken to control these risks

 

•  Overseeing business continuity programs

 

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

 

  

•  Overseeing, with the Regulatory and Public Policy Committee, cybersecurity and other risks relevant to our information technology environment

 

•  Reviewing compliance with significant applicable legal, ethical, and regulatory requirements, including those relating to regulatory matters that may have a material impact on our 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 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 Audit Committee Responsibilities Calendar accompanying the Audit Committee Charter describes the Committee’s specific responsibilities.

 

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The Board has determined that each Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. In addition, the Board has determined that Ms. List-Stoll, Messrs. Johnston and Noski, and Dr. Panke are “audit committee financial experts” as defined by SEC rules.

 

 

Compensation Committee

 

 

The primary responsibilities of the Compensation Committee are to:

 

•   Assist our Board of Directors in establishing the annual goals and objectives of the chief executive officer

 

•   Establish the process for annually reviewing the chief executive officer’s performance

 

•   Make a recommendation for our chief executive officer’s compensation to the independent members of our Board

 

•   Oversee the performance evaluation of the members of the corporate senior leadership team other than the chief executive officer and approve their annual compensation, including salary and incentive compensation targets and awards

 

•   Oversee and advise our Board on the adoption of policies that govern executive officer compensation programs and other compensation-related polices for the executive officers

 

  

•   Assist the Board in overseeing development and corporate succession plans for the corporate senior leadership team

 

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

 

•   Review and provide guidance to our 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 workforce 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 and compensation and benefits support the Compensation Committee in its work. The Committee delegates to senior management the authority to make equity compensation grants to employees who are not members of the corporate senior leadership team and to administer the Company’s equity-based compensation plans.

The Compensation Committee Charter describes the specific responsibilities and functions of the Committee.

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. The firm consults with the Committee about its recommendations to the Board on chief executive officer compensation.

Compensation consultant is independent

Semler Brossy is directly accountable to the Compensation 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 http://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

 

  Does not provide any unrelated services or products to the Company, its affiliates, or management, except for surveys purchased from the consultant firm

 

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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.

 

 

Governance and Nominating Committee

 

 

The principal responsibilities of the Governance and Nominating Committee are to:

 

  Determine and recommend the slate of director nominees for election to our Board of Directors at 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

The Governance and Nominating Committee annually reviews the charters of Board committees and, after consultation with the respective committees, makes recommendations, if necessary, about changes to the charters. The Governance and Nominating Committee Charter describes the specific responsibilities and functions of the Committee.

 

 

Regulatory and Public Policy Committee

 

 

The principal responsibilities of the Regulatory and Public Policy Committee are to:

 

•   Review and advise the Board of Directors and management about legal, regulatory, and compliance matters concerning competition and antitrust, data privacy, cybersecurity, workforce, and immigration laws and regulation

 

•   With the Audit Committee, review risks relevant to our information system architecture and controls and cybersecurity

 

•   With the Compensation Committee, review policies, programs, and initiatives for workforce management and diversity and inclusion

 

  

   Review our policies and programs that relate to matters of corporate social responsibility, including human rights, environmental sustainability, responsible sourcing, and philanthropy

 

   Review our government relations activity and political activities and expenditures

The Regulatory and Public Policy Committee Charter describes the specific responsibilities and functions of the Committee.

 

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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. Our objective is to pay non-employee directors over time at or near the median of the proxy peer group, to award the majority of compensation in equity, and to make meaningful adjustments every few years, rather than smaller adjustments that are more frequent. As a result, typically we make adjustments when we fall below the median, and after adjustments, we exceed the median. There was no change in fiscal year 2017. As our CEO, Mr. Nadella does not receive additional pay for serving as a director. Mr. Gates has waived his cash and equity awards.

 

 

 

 

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

 

  

 

 

 

$30,000  

 

 

 

Annual audit committee member retainer

 

  

 

 

 

$15,000  

 

 

 

Independent chairman retainer

 

  

 

Annual independent chairman retainer (TOTAL – in lieu of other retainers)

 

  

 

 

 

$675,000  

 

 

 

Cash

 

  

 

 

 

$125,000  

 

 

 

Stock award

 

  

 

 

 

$550,000  

 

 

 

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.

Directors may elect to defer and convert to equity all or part of their annual cash retainer, and to defer receipt of all or part of their annual equity 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; dividends paid on the deferred equity are deemed to be invested in our common stock. We calculate the number of shares credited by dividing each quarterly 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.

 

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Fiscal year 2017 director compensation

This table describes the cash and equity portions of the annual retainer paid to each non-employee director who served in fiscal year 2017. Mr. Nadella received no compensation as a director. He is excluded from the table because we fully describe his compensation in Part 3 – “Named executive officer compensation.”

 

Name

 

  

Fees earned or
paid in cash¹

($)

 

      

Stock awards
($)

 

      

 

Matching
charitable
gifts²

($)

 

      

Total
($)

 

 

 

William H. Gates III³

 

    

 

0

 

 

 

      

 

0

 

 

 

      

 

0

 

 

 

      

 

0

 

 

 

 

Reid G. Hoffman4

 

    

 

20,483

 

 

 

      

 

32,773

 

 

 

      

 

0

 

 

 

      

 

53,256

 

 

 

 

Teri L. List-Stoll5

 

    

 

140,000

 

 

 

      

 

200,000

 

 

 

      

 

15,000

 

 

 

      

 

355,000

 

 

 

 

G. Mason Morfit

 

    

 

140,000

 

 

 

      

 

200,000

 

 

 

      

 

0

 

 

 

      

 

340,000

 

 

 

 

Charles H. Noski6

 

    

 

170,000

 

 

 

      

 

200,000

 

 

 

      

 

0

 

 

 

      

 

370,000

 

 

 

 

Helmut Panke

 

    

 

155,000

 

 

 

      

 

200,000

 

 

 

      

 

5,000

 

 

 

      

 

360,000

 

 

 

 

Sandra E. Peterson7

 

    

 

125,000

 

 

 

      

 

200,000

 

 

 

      

 

15,000

 

 

 

      

 

340,000

 

 

 

 

Charles W. Scharf

 

    

 

125,000

 

 

 

      

 

200,000

 

 

 

      

 

0

 

 

 

      

 

325,000

 

 

 

 

John W. Stanton

 

    

 

140,000

 

 

 

      

 

200,000

 

 

 

      

 

0

 

 

 

      

 

340,000

 

 

 

 

John W. Thompson8

 

    

 

125,000

 

 

 

      

 

550,000

 

 

 

      

 

15,000

 

 

 

      

 

690,000

 

 

 

 

Padmasree Warrior9

 

    

 

125,000

 

 

 

      

 

200,000

 

 

 

      

 

0

 

 

 

      

 

325,000

 

 

 

 

(1) The value of fractional shares is excluded.
(2) Amounts in this column represent matching charitable contributions under our corporate giving program.
(3) Mr. Gates waived his cash and equity retainer.
(4) Mr. Hoffman’s compensation was pro-rated beginning with his service on March 14, 2017. He elected to defer his cash and stock compensation. The compensation deferred converted into 756 shares of our common stock. The aggregate award value in the “Stock awards” column represents one prorated quarterly award with a grant date fair value under FASB Accounting Standards Codification Topic 718 (“ASC 718”) of $32,773.
(5) Ms. List-Stoll elected to defer her cash and stock compensation. The compensation deferred converted into 5,385 shares of our common stock. The aggregate award value in the “Stock awards” column represents four quarterly awards, each with a grant date fair value under ASC 718 of $50,000.
(6) Mr. Noski elected to defer the stock award component of his compensation. The compensation deferred converted into 3,168 shares of our common stock. The aggregate award value in the “Stock awards” column represents four quarterly awards, each with a grant date fair value under ASC 718 of $50,000.
(7) Ms. Peterson elected to defer her cash and stock compensation. The compensation deferred converted into 5,147 shares of our common stock. The aggregate award value in the “Stock awards” column represents four quarterly awards, each with a grant date fair value under ASC 718 of $50,000.
(8) Mr. Thompson elected to defer the stock award component of his compensation. The compensation deferred converted into 8,712 shares of our common stock. The aggregate award value in the “Stock awards” column represents four quarterly awards, each with a grant date fair value under ASC 718 of $137,500.
(9) Ms. Warrior elected to defer a portion of her cash retainer. The compensation deferred converted to 987 shares of our common stock. The aggregate award value in the “Stock awards” column represents four quarterly awards, each with a grant date fair value under ASC 718 of $50,000.

Non-executive Chairman compensation

The independent members of the Board appointed John Thompson as independent non-executive Chairman of the Board. Mr. Thompson’s pay reflects the additional time commitment for this role compared to other non-employee directors, which includes: (i) managing meetings of the Board of Directors, leading the work to set the agenda for Board meetings, leading the Board’s annual chief executive officer performance review, and representing the Board at the annual shareholders meeting, (ii) meeting with the Company’s shareholders, (iii) acting as an advisor to Mr. Nadella on strategic aspects of the chief executive officer role with regular consultations on major developments and decisions that are likely to be of interest to the Board, and (iv) when requested, interacting with external audiences. To compensate Mr. Thompson for the greater responsibilities of the non-executive Chairman role, he receives the annual chairman retainer in lieu of the regular Board retainers.

Director stock ownership policy aligns interests with shareholders

To align the interests of our directors and shareholders, our Board of Directors believes that directors should have a significant financial stake in Microsoft. Under the Corporate Governance Guidelines, each director should 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 2017.

 

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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. We will refer to these relationships generally as related-party transactions.

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

In April 2017, the Company acquired Intentional Software Corporation (“ISC”), a company that developed software for large screen or “whiteboard” applications. Mr. Gates was the sole owner of an entity that provided funding for ISC in exchange for options to acquire licenses for certain applications developed by ISC. In connection with the Company’s acquisition of ISC, ISC reimbursed Mr. Gates’ entity an amount approximately equal to the amount the entity paid for the license options ($60 million) in exchange for terminating the option, reduced by $15 million that is held in an indemnification escrow. The terms of the acquisition were negotiated at arms-length between ISC and the business group that acquired the ISC whiteboard application, and were fair and in the best interest of the Company. Mr. Gates was not involved in negotiating the agreement or setting the price or other terms, whether on behalf of Microsoft or ISC. The Board (with Mr. Gates abstaining) reviewed and approved the transaction.

 

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3. Named executive officer compensation

 

 

Proposal 2: Advisory vote to approve named executive officer compensation  

 

 

 

 

As required by SEC rules, we are asking for your advisory vote on the following resolution (the “say-on-pay” resolution):

 

Resolved, that the shareholders approve, in a nonbinding vote, the compensation of the Company’s named executive officers, as disclosed in “Part 3 – Named executive officer compensation.”

 

The affirmative vote of a majority of the shares of common stock cast is required to approve this proposal. We hold our say-on-pay vote every year. Proposal 3 provides our shareholders with the opportunity to cast an advisory vote on the frequency of say-on-pay votes. Unless the Board modifies its policy on the frequency of the say-on-pay votes, the next say-on-pay vote will occur in 2018.

 

   
   

 

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Our Board of Directors recommends a vote FOR approval, on a non-binding, advisory basis, of the compensation paid to our named executive officers in fiscal year 2017.

Statement in support

Pay for performance

Through our ongoing shareholder engagement, we receive consistent feedback that our investors favor incentive compensation arrangements tied to specific performance measures that drive long-term performance and value creation. We have been steadily evolving our program to implement a design that incorporates performance elements directly linked to achievement of our three strategic ambitions.

Key features of our fiscal year 2017 executive compensation program were:

•   56% of the annual target compensation opportunity for our named executive officers was performance-based, on average

 

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

 

•   Half of the annual target equity opportunity for our named executive officers was delivered in the form of a performance-based stock award with payouts based on achievement against pre-established strategic performance objectives

 

•   Metrics under our performance stock awards were refined to align with our three ambitions, reduce overlap with the annual cash incentive, and 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 interests of our long-term shareholders

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Pay for Performance 50% annual cash incentive was determined formulaically, based on achievement against pre-established financial targets. determined qualitatively based on assessment of three weighted performance categories 50% (product and strategy; customers and stakeholders; and culture and organizational leadership The maximum possible result for each financial target or performance category was 200% of target.

 

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Sound program design

We design our executive compensation program to attract, motivate, and retain the key executives who drive our success. Pay that reflects performance and alignment of that pay with the interests of long-term shareholders are key principles that underlie our compensation program. We achieve these objectives through compensation that:

 

 

•  Provides a competitive total target pay opportunity

 

•  Consists primarily of equity compensation, which encourages our executives to act as owners with a significant stake in Microsoft

 

•  Delivers a majority of pay based on performance

 

•  Balances long-term and short-term incentives

 

 

•  Enhances retention by subjecting a significant percentage of total target compensation to multi-year performance requirements or vesting

 

•  Makes prudent use of our equity

 

•  Does not encourage unnecessary and excessive risk taking

 

Best practices in executive compensation

The compensation program for our executive officers demonstrates we follow best practices.

 

 

We do

 

LOGO    Have a stock ownership policy that reinforces alignment between the interests of our shareholders and our executive officers

 

LOGO    Have a strong clawback policy to ensure accountability

 

LOGO    Prohibit pledging, hedging, and trading in derivatives of Microsoft securities

 

LOGO    Have an independent compensation consultant advising the Compensation Committee

 

LOGO    Responsibly manage the use of equity compensation

  

We do not

 

Ó   Offer excessive perquisites (no executive-only club memberships, medical benefits, or tax gross-ups)

 

Ó   Have employment contracts

 

Ó  Provide change in control benefits

 

Ó  Have executive-only retirement programs

 

Ó   Guarantee bonuses

 

Ó  Pay dividends on unvested stock awards

 

Our Board and Compensation Committee reviewed the prior year’s voting results and, through our regular shareholder engagement, sought to understand the factors that influenced voting decisions. The Board and the Compensation Committee will continue to consider feedback obtained through this process in making future decisions about our executive compensation program.

 

 

Compensation discussion and analysis

This Compensation Discussion and Analysis provides information about our fiscal year 2017 compensation program for our fiscal year 2017 named executive officers (the “Named Executives”).

The content of this Compensation Discussion and Analysis is organized into four sections.

 

      See page
Section 1     Executive compensation overview   33
Section 2    

Fiscal year 2017 compensation decisions

  38
Section 3     Fiscal year 2017 compensation design process   43
Section 4     Other compensation policies and information   46

 

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Section 1 – Executive compensation overview

Beginning with fiscal year 2015, our Compensation Committee and Board charted a course to transform our executive pay program to include significant performance attributes. They 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. Once our new strategy was set, additional performance-based pay elements were added. Fiscal year 2017 completed this evolution, with 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.

This effort was grounded in a compensation philosophy aimed at achieving strong alignment between the Company’s long-term strategic goals and our shareholders’ interests. We actively engaged with our shareholders seeking their input about features they valued as we evolved the program design.

Our long-term strategic goals derive from our mission and worldview, and are reflected in our three interconnected ambitions.

 

 

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Our culture remains a key ingredient in achieving our ambitions. For us, culture is a constant process of renewal in which we need to exhibit a growth mindset and push ourselves to be more customer obsessed, to be more diverse and inclusive, and to operate as One Microsoft.

Shareholder feedback considered in evolution of pay program

Our Board actively engages with our shareholders on a range of topics, including executive compensation. We deeply value the continued interest of and feedback from our shareholders, and are committed to maintaining our active dialogue with them to ensure their perspectives are thoughtfully considered. The Compensation Committee carefully considers 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 plan.

 

2017 PROXY STATEMENT  33

MISSION Empower very person and every organization on the planet to achieve more WORLDVIEW Intelligent cloud, intelligent edge AMBITIONS Reinvent productivity & business processes Create more personal computing Build the intelligent cloud platform


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At the 2016 Annual Meeting, 96.1% of the votes cast supported our advisory resolution on the compensation of our Named Executives (the “say-on-pay” vote). In fiscal year 2017, our Chairman, our Compensation Committee Chair, and members of senior management have spoken about our executive compensation with shareholders owning almost 45% of our shares.

During these discussions, we reviewed our executive compensation philosophy and sought shareholder views on our plans to introduce more performance-based pay in fiscal year 2017 for all executive officers. The feedback gained from these interactions was important to the design of the executive compensation program. Shareholders generally viewed the evolution of our compensation plan as consistent with what the Company previously communicated in its outreach over the past three years. Based on input from our shareholders, the Compensation Committee determined that the fiscal year 2017 executive compensation program substantially addressed their views about our pay plan.

Annual compensation components

Our Named Executives’ annual compensation consisted of 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 50% performance stock awards (“PSAs”) and 50% time-based stock awards (“SAs”).

 

 

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Incentive Plan Revenue (25%) Incentive Plan Operating income (25%) Product & strategy (16.67%) Customers & stakeholders (16.67%) Culture & organizational leadership (16.66%) Financial/ formulaic (50%) Qualitative (50%) Commercial cloud revenue (34%) Commercial cloud subscribers (33%) Windows 10 monthly active devices (11%) Surface gross margin (11%) Consumer post-sales monetization gross margin (11%) Relative TSR multiplier is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500. NEO pay mix 7.6% 36.6% 36.6% 19.2% FY17 cash incentive FY17 PSA Salary Stock awards Cash incentive Performance stock awards Over half of Microsoft’s target pay is performance-based and almost three-fourths is equity-based Fiscal year 2017 compensation structure


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The chart below summarizes key attributes of each pay element, its share of target annual compensation, and key updates for fiscal year 2017.

 

 

Element

 

 

Attributes

 

 

Key updates for fiscal year 2017

 

Base salary <10%

 

Aligns with scope and complexity of role and prevailing market conditions; salary levels are generally at or below market median

 

 

Cash incentive <20%

 

FY17 metrics

 

Financial / formulaic (50%)

 

•  Incentive Plan revenue (25%)*

•  Incentive Plan operating income (25%)*

 

Qualitative performance categories (50%)

 

•  Product & strategy (16.67%)

•  Customers & stakeholders (16.67%)

•  Culture & organizational leadership (16.66%)

 

 

 

Structured framework instituted for all NEOs

 

50% determined formulaically based on pre-established financial targets

Performance-based

stock >35%

 

FY17 quantitative metrics

 

•  Commercial cloud revenue (34%)

•  Commercial cloud subscribers (33%)

•  Windows 10 monthly active devices (11%)

•  Surface gross margin (11%)

•  Consumer post-sales monetization gross margin (11%)

 

 

Maximum payout reduced from 300% in 2016 to 200% in 2017, before relative TSR multiplier**

 

Quantitative metrics refined to directly align with our three ambitions, reduce overlap with annual cash incentive goals, and drive long-term growth

Time-based stock >35%

 

Vests over four years to support retention and align with our shareholders’ interests

 

 
* “Incentive Plan revenue” and “Incentive Plan operating income” are defined in Annex A.
** The relative TSR multiplier is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500. If earned, the relative TSR multiplier can increase the PSA shares awarded by up to 50%.

Fiscal year 2017 cash incentives. Target cash incentives for our Named Executives were approved in September 2016. Target amounts ranged from 200% to 300% of base salary earned in fiscal year 2017. The maximum possible cash incentive was 200% of the target and the maximum result for each financial measure or performance category was 200% of target. The Incentive Plan Revenue and Incentive Plan Operating Income performance targets for the cash incentives were based on achieving the Company’s 2017 operating budget approved by the Board and reflecting appropriately ambitious performance goals.

Fiscal year 2017 PSAs. PSAs were granted in September 2016 for a target number of shares of Microsoft common stock. The number of earned shares under the fiscal year 2017 PSAs will be determined after the 3-year performance period ending June 30, 2019 based on performance metrics for the performance period. Earned PSA shares vest following conclusion of the 3-year performance period, ensuring a focus on longer-term success. Fiscal year 2017 PSA performance metrics are strategic measures that align with our three ambitions and are aimed at driving new growth areas for our commercial and consumer businesses. These metrics were selected because they address areas that support long-term growth of our business, focusing on our emerging growth opportunities. The Compensation Committee is committed to setting rigorous performance goals, with the guideline that the probability of achieving the target result ranges from 40% to 60%. The metrics are reassessed, and targets set, annually because of the dynamic technology markets in which Microsoft operates. As a result, during the three-year performance period, separate targets are established for each year of performance. In establishing metrics, the Committee is mindful of the importance of balancing the business need for flexibility and long-term accountability.

 

2017 PROXY STATEMENT  35


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To avoid duplicating metrics across the incentive pay elements, beginning in fiscal year 2017 revenue and operating income were no longer used as PSA metrics because they were included as key components in our annual cash incentive.

At the same time, the total equity opportunity was divided equally between target PSAs and SAs and the maximum PSA opportunity before applying the relative TSR multiplier was reduced from 300% to 200%. If the full relative TSR multiplier is earned, the maximum PSA payout would be 300% of target.

The final number of earned shares will be calculated based on the aggregate results over the three separate years in the PSA performance period. Relative TSR is measured over the three-year period and, if earned, is applied to the aggregate PSA performance results.

 

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Fiscal year 2017 PSA metrics Performance metrics Metric description FY17 commercial cloud revenue Net revenue for commercial cloud-based solutions, including Office 365 commercial, Azure, Dynamics 365, and other cloud properties FY17 commercial cloud subscribers Paid seats for current or new per-user SaaS cloud services primarily in commercial customer segment FY17 Windows 10 monthly active devices (“MAD”) Comprises all Windows 10 MAD, including PCs, tablets, mobile devices, gaming consoles, and connected Internet of Things (“IoT”) devices at fiscal year end FY17 Surface gross margin Gross margin from Surface and firstparty accessories, excluding Surface Hub FY17 consumer post-sales monetization gross margin Search, Store, Display/Homepage, Gaming, and Office Consumer


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Attributes of fiscal year 2017 PSAs

 

 

Award feature

 

 

 

Design

 

 

 

Rationale

 

 

Performance period

 

 

Three years, with metrics reassessed and targets set annually

 

 

Reinforces importance of long-term value creation because the value of shares that vest depends on the change in our share price over the performance cycle, and also allows for adjusted priorities in a rapidly changing competitive business environment

 

 

Performance measures

 

 

Company-wide quantitative performance metrics. No payouts if metrics are below threshold level.

 

 

 

Establishes shared targets that drive accountability for annual business performance while striving for major strategic objectives

 

 

Overlapping performance periods

 

 

New three-year performance period begins each fiscal year, with performance periods overlapping (see graphic below)

 

 

Overlapping performance periods limit impact of short-term business performance or share price fluctuations on final outcomes

 

 

Payout opportunity

 

 

0% to 200% of the target number of shares, before the relative TSR multiplier

 

 

Provides accountability for underperformance and incentive for outperformance. Maximum payouts expected to be rare and only possible when Microsoft has exceptional performance.

 

 

Relative TSR multiplier

 

 

Triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500 for the performance period. The multiplier will increase the number of potential shares linearly up to an additional 50% of earned shares when Microsoft’s relative TSR is at or above the 80th percentile.

 

 

Provides an opportunity to receive additional shares only if Microsoft significantly outperforms the market

 

Overlapping performance periods with consistent performance goals

 

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Fiscal year 2017 SAs. As described above, 50% of our Named Executives’ Incentive Plan equity awards were target PSAs and 50% were SAs. SAs were granted under the Incentive Plan in September 2016 for shares of Microsoft common stock. SAs vest over four years (25% on initial vesting date, and 12.5% each six months thereafter) to support retention and align with shareholders’ interests. Mr. Courtois also received a one-time promotion award when he was appointed President, Microsoft Global Sales, Marketing, and Operations and an executive officer, recognizing the expanded scope of his responsibilities.

No other fiscal year 2017 compensation. During fiscal year 2017, no other compensation was awarded to our Named Executives.

 

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Section 2 – Fiscal year 2017 compensation decisions

Business results

See “Our business performance” discussion beginning on page 4 in the Proxy summary.

Decisions

The Compensation Committee approved the fiscal year 2017 base salaries, cash incentives, and equity incentive compensation for our Named Executives, except Mr. Nadella. For Mr. Nadella, the Committee made recommendations for, and the independent members of the Board approved, Mr. Nadella’s base salary, cash incentive, and equity incentive compensation. Decisions on base salaries, target awards for cash incentives, and shares subject to SAs and target PSAs, were made as part of the review of target annual compensation opportunities for all of the Named Executives, as described more fully in “Establishing compensation opportunities” beginning at page 45. The Committee and the independent members of the Board exercised their business judgment in making decisions and recommendations for our Named Executives’ compensation.

More detail about the processes used to determine the compensation awarded each Named Executive follows.

Fiscal year 2017 base salaries

As part of the review of target annual compensation opportunities, the Compensation Committee and, for Mr. Nadella, the independent members of the Board, approved increases to our Named Executives’ base salaries in September 2016. After considering the scope of Mr. Nadella’s role, his development as CEO and effective leadership of the Company, that his salary was unchanged since he became CEO in February 2014, and that his $1,200,000 salary was in the bottom quartile of CEO salaries at peer companies, the Committee recommended, and the independent members of the Board approved, an increase in Mr. Nadella’s base salary to $1,500,000 which aligned with median peer company salaries. The Committee also approved market-competitive base salary increases of $132,500 for Ms. Hood and $85,000 for Mr. Smith. We believe our Named Executives’ salary levels continue to be appropriate and reasonable given their capability and experience.

Cash incentive awards

The Compensation Committee increased fiscal year 2017 target percentages for cash incentives, which are measured as a percentage of salary, by 11% for Ms. Hood and by 25% for Mr. Smith.

The Compensation Committee and, for Mr. Nadella, the independent members of the Board, determined the fiscal year 2017 cash incentive awards. These were based on two elements: quantitative financial performance measures and qualitative performance categories.

Financial performance

We achieved greater than maximum performance on the financial measures, as shown below, resulting in a weighted payout of 200%.

 

Formulaic financial results (50% weight)¹

($ in billions)

  

Threshold

      

Target

      

Maximum

      

Actual

 

Fiscal year 2017 Incentive Plan revenue

     $88.81          $92.00          $93.50         
$94.66
 

Fiscal year 2017 Incentive Plan operating income

     $24.94          $27.89          $30.28         
$30.51
 
(1) Incentive Plan revenue and Incentive Plan operating income are calculated using Microsoft non-GAAP accounting measures, which assume constant dollar foreign exchange rates and excludes the net impact of Windows 10 revenue deferrals, impairment and restructuring charges, and LinkedIn financial results. The results above are different than those disclosed in our fourth quarter 2017 earnings release because our internal plan is based on constant dollars and non-GAAP earnings are reported using constant currency. See Annex A for more information on the calculation of these non-GAAP performance measures.

 

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The fiscal year 2017 Incentive Plan revenue and operating income performance targets were based on achieving the Company’s 2017 operating budget approved by the Board, and were higher than our fiscal year 2016 actuals for both metrics, further reflecting appropriately ambitious performance goals.

 

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Qualitative performance categories

50% of our Named Executives’ fiscal year 2017 annual cash incentives were determined based on subjective scoring of their 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):

 

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These performance indicators were drawn from the scorecard we used to manage performance against Microsoft’s annual business plan. Mr. Nadella’s performance was assessed on all these performance indicators.

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

 

  input from Microsoft’s senior executives about Mr. Nadella’s leadership,

 

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

 

  the Company’s performance relative to other technology companies.

For the other Named Executives, the Compensation Committee also placed significant weight on Mr. Nadella’s recommendations and his evaluation of each Named Executive’s performance for the past fiscal year because of his first-hand knowledge of each of their contributions.

 

2017 PROXY STATEMENT  39

Product & strategy Customers & stakeholders Culture & organizational leadership Contribution margin Corporate citizenship Compliance and integrity Efficiency and productivity Customer acceptance Organizational diversity and inclusion Innovation Customer satisfaction Leadership effectiveness Product development and Developer community satisfaction implementation strategic progress Quality


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Fiscal year 2017 cash incentive calculations

Final results under the formulaic and structured framework portions of the cash incentive, and the resulting awards were as follows:

 

     

 

Nadella

 

    

 

Hood

 

      

Courtois

 

      

Johnson

 

      

Smith

 

 

 

Financial results (50%)

 

    

 

200.00%

 

 

 

    

 

200.00%

 

 

 

      

 

200.00%

 

 

 

      

 

200.00%

 

 

 

      

 

200.00%

 

 

 

 

Qualitative performance results (50%)

 

    

 

123.33%

 

 

 

    

 

140.00%

 

 

 

      

 

130.00%

 

 

 

      

 

103.33%

 

 

 

      

 

130.00%

 

 

 

 

Total FY17 cash incentive (% of target)

 

    

 

161.66%

 

 

 

    

 

170.00%

 

 

 

      

 

165.00%

 

 

 

      

 

151.66%

 

 

 

      

 

165.00%

 

 

 

 

Total FY17 cash incentive ($)

 

    

 

$7,032,406

 

 

 

    

 

$3,624,896

 

 

 

      

 

$2,762,884

 

 

 

      

 

$2,168,795

 

 

 

      

 

$3,241,543

 

 

 

Fiscal year 2017 qualitative performance category key 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.

 

 

Weighted performance categories - Satya Nadella

 

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Total Weighted Qualitative Performance Result

 

 

123.33%      

 

   
      

 

(1) Product & strategy

 

    

 

Weight

 

 

 

Assessment  

 

 

 

The Company continued to gain momentum in its cloud services, with a continuing opportunity to do even more.

 

Commercial cloud annualized revenue run rate reached $18.9 billion, on track to achieve the goal of $20 billion in FY18. The Company’s growth in cloud services reflected further progress in all core components (Azure, Dynamics, Office 365, and Microsoft 365). Azure revenue grew 99%, reflecting improved Azure differentiation, with positive momentum and feedback from customers around our hybrid consistency, developer productivity, and trusted approach. Office 365 is continuing to drive innovation and value such as Microsoft Teams, and as a result driving commercial seats growth of 31%.

 

There was important progress on Windows, especially in product quality and enterprise adoption, with Windows commercial products and cloud services revenue up 5%. The introduction of Windows 10 S was an important step in addressing the education market with room for further progress. More work remains in areas like browser share, and to innovate to pursue IoT opportunities and new platform waves. With its Surface line of products, the Company continued to make progress in creating new hardware categories and improving product quality. Surface revenue declined slightly at 2% with room to improve through more innovation across device and software boundaries. Progress was made in gaming with the introduction of Mixer and Xbox Game Pass leading to more than 53 million active Xbox Live subscriptions.

 

The Company pivoted to make progress on artificial intelligence and machine learning, which quickly have become vital across our product lines. There was good progress on our security protection and accessibility-related features across our products and services. The Company successfully completed the acquisition of LinkedIn. There was progress in the initial months of owning LinkedIn and product integrations with Office 365 and Dynamics 365 and more opportunity for product innovation lies ahead.

 

 

 

 

33.3%

 

 

 

 

100%  

 

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(2) Customers & stakeholders

 

    

 

Weight

 

 

 

Assessment  

 

 

 

The Company continued to strengthen its brand, particularly the perception of Microsoft as an innovator and as a leader in the cloud. The Company continued to build strong relationships with customers that drove significant value for the Company. The ongoing field transformation undertaking will need to scale these efforts even further.

 

The engagement with constituencies in government, the industry, and the media was effective, impacting the Company positively.

 

Microsoft leadership with initiatives such as its Autism Program, Rural Broadband initiative, and call for a Digital Geneva Convention, was positively recognized by many stakeholders. Mr. Nadella’s relationships with external stakeholders, including shareholders, continue to be a priority and a strength.

 

 

 

33.3%

 

 

 

125%  

 

 

 

(3) Culture & organizational leadership

 

    

 

Weight

 

 

 

Assessment  

 

 

 

The Company is undergoing an impressive cultural transformation under Mr. Nadella’s leadership. The Company is embracing the growth mindset, with employee sentiment that the Company embodies that mindset increasing year-over-year. Employee sentiment on company direction and leadership is also high and improving. The Company widely adopted leadership principles that help its leaders deliver clarity, generate energy, and deliver success.

 

The Company also reinforced its compliance program, and an accompanying Microsoft Runs on Trust campaign. Microsoft was again one of Ethisphere’s 2017 World’s Most Ethical Companies.

 

The Company made progress in diversity, increasing its U.S. representation of African American/Black, Hispanic/Latino, and female employees. Microsoft received a 100% Corporate Equality Index Score for the 11th consecutive year from the Human Rights Campaign.

 

 

 

 

33.3%

 

 

 

 

145%  

 

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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 strong financial performance and management that contributed to one-year total shareholder return of 38.0%, and returned over $22 billion in cash to shareholders through stock buybacks and dividends.

•    Continued strategic capital allocation and disciplined cost management, resulting in 12% growth of EIP operating income to $30.5 billion as resources were reprioritzed to high growth areas.

•    Drove strong execution of the Company’s acquisition and integration of LinkedIn.

•    Provided effective communication to investors regarding the Company’s strategies and results.

•    Strengthened enterprise risk management and compliance environments broadly.

•    Realigned global finance organization, maintaining strong engagement and performance while implementing the Company’s most innovative technologies to transform Finance.

•    Championed diversity and inclusion within finance organization and across Microsoft.

 

Jean-Philippe Courtois

 

 

 

•    Led Global Sales, Marketing, and Operations groups to deliver a strong financial year, exceeding contribution margin goals and contributing to 4% growth of EIP revenue.

•    Executed large strategic deals that contributed to a 57% increase in commercial cloud revenue.

•    Azure revenue grew 99% with an opportunity to further accelerate sales force capability on cloud strategy.

•    Drove the successful transformation of our global sales organization, and incorporated U.S. subsidiary as part of his global organization.

•    Strengthened customer and partner experience across the managed partner business.

•    Visible and effective advocate for diversity and inclusion.

•    Embodied “One Microsoft” principles in facilitating company-wide sales transformation.

 

Margaret L. Johnson

 

 

 

•    Executed business partnerships with several key organizations in support of our Intelligent Cloud, Business Processes, and More Personal Computing initiatives.

•    Led MS Ventures to a strong year with numerous investments in new technologies, notably in artificial intelligence, mixed reality and Connected Vehicle Platform.

•    Continued to provide meaningful progress on developing and maintaining strategic partnerships.

•    Continued to be a strong representative for Microsoft by presenting on key topics that span business, technology, and Microsoft’s digital transformation.

•    Highly effective leader and advocate for driving diversity and inclusion for the business development organization and more broadly across Microsoft.

 

Bradford L. Smith

 

 

 

•    Made significant contributions in advancing Microsoft’s cloud strategy and building the trusted cloud by launching new cybersecurity and privacy initiatives and establishing the Company as a public policy leader globally, including the call for a Digital Geneva Convention.

•    Played a strategic role in advancing large cloud transformation deals.

•    Successfully obtained regulatory approvals for LinkedIn acquisition.

•    Deployed the Company’s patents to advance the Company’s cloud strategy and continued to effectively generate value from its patent portfolio.

•    Devised Airband Initiative to bring cost-effective broadband to rural America.

•    Continued to invest and innovate in the Company’s compliance and integrity programs, including an internal “Microsoft Runs on Trust” campaign.

•    Continued to build momentum and drive policy both externally and internally relating to diversity and inclusion.

Fiscal year 2017 stock awards

As part of the review of target annual compensation opportunities, the Compensation Committee and independent Board members granted equity compensation under the Incentive Plan to each of the Named Executives for fiscal year 2017. The awarded shares were granted 50% as target PSAs, and 50% as SAs. The actual number of shares received under a PSA will range from 0-300% of the target shares, as described below. The Committee and the independent Board members believed the 50/50 balance between SAs and PSAs appropriately supported our long-term business goals and long-term retention incentives for our Named Executives. Overall, at least 70% of the annual target compensation opportunity for each Named Executive is equity-based to align their interests with those of our shareholders.

 

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The fiscal year 2017 Incentive Plan PSAs and SAs granted to our Named Executives are listed below.

 

Named Executive

 

    

Performance

stock awards

(target number
of shares)¹

 

      

Time-based

stock awards

(number

of shares)²

 

      

Aggregate

awarded

value³

($)

 

 

 

Satya Nadella

 

      

 

130,526

 

 

 

      

 

130,526

 

 

 

      

 

15,000,000

 

 

 

 

Amy E. Hood

 

      

 

80,926

 

 

 

      

 

80,926

 

 

 

      

 

9,300,000

 

 

 

 

Jean-Philippe Courtois4

 

      

 

65,263

 

 

 

      

 

65,263

 

 

 

      

 

7,500,000

 

 

 

 

Margaret L. Johnson

 

      

 

43,509

 

 

 

      

 

43,509

 

 

 

      

 

5,000,000

 

 

 

 

Bradford L. Smith

 

      

 

71,354

 

 

 

      

 

71,354

 

 

 

      

 

8,200,000

 

 

 

(1) PSAs vest in full following the end of the three-year performance period, with the number of shares determined based on performance against goals set for the period.
(2) The time-based stock awards vest 25% on August 31 following the date of grant, and thereafter 12.5% each six months until fully vested.
(3) Awarded value (in dollars) was converted to shares using the closing share price on August 31, 2016, rounded up to a whole number.
(4) Does not include 10,443 shares granted in fiscal year 2017 to Mr. Courtois for his fiscal year 2016 performance before he became a Named Executive or 158,563 shares granted in July 2016 as a one-time promotion stock award made when Mr. Courtois was appointed President, Microsoft Global Sales, Marketing, and Operations and an executive officer, recognizing the expanded scope of his responsibilities.

The amounts listed in the table above for fiscal year 2017 Incentive Plan 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, stock awards listed in the Summary compensation table and Grants of plan-based awards table include portions of 2016 and 2017 PSA awards, as described in more detail in Note 2 to the Summary compensation table on page 50. Because we have not reached the end of our first three-year performance period for PSAs, the determination of earned shares under any PSA has not been made.

The following results for fiscal year 2017 affect the 2019 payouts under fiscal year 2016 PSAs. The Incentive Plan revenue and Incentive Plan operating income metrics for fiscal year 2017 represent one-sixth of the FY16 PSA target shares. The ultimate payout will be determined at the completion of the full three-year performance period.

 

 

Fiscal year 2017 financial metrics for

fiscal year 2016 PSAs (year 2 of 3)1

($ in billions)

 

  

Threshold

 

    

Target

 

    

Maximum

 

    

Actual

 

    

 

Payout as %
of target
award

 

 

 

Fiscal year 2017 Incentive Plan revenue

    

 

88.81

 

 

 

    

 

92.00

 

 

 

    

 

95.00

 

 

 

    

 

94.66

 

 

 

    

 

277.33%

 

 

 

 

Fiscal year 2017 Incentive Plan operating income

    
24.94
 
    
27.89
 
    
32.68
 
    
30.51
 
     209.39%  
(1) Incentive Plan revenue and Incentive Plan operating income are calculated using Microsoft non-GAAP accounting measures, which assume constant dollar foreign exchange rates and excludes the net impact of Windows 10 revenue deferrals, impairment and restructuring charges, and LinkedIn financial results. The results above are different than those disclosed in our fourth quarter 2017 earnings release because our internal plan is based on constant dollars and non-GAAP earnings are reported using constant currency. See Annex A for more information on the calculation of these non-GAAP performance measures.

Section 3 – Fiscal year 2017 compensation design process

Executive compensation program design

Our compensation design starts with these tenets:

 

  We pay competitively to provide a target compensation opportunity that will attract, motivate, and retain the executives who drive our success and industry leadership

 

  At least 70% of the annual target compensation opportunity for our executives is delivered in equity to incentivize a long-term perspective and strong alignment with our shareholders

 

  We explicitly tie pay to performance by delivering a large majority of our executives’ target compensation opportunity through performance-based incentives

 

  We focus on the long term by subjecting a large majority of total compensation to multi-year vesting or performance requirements

 

  We avoid encouraging unnecessary and excessive risk-taking through our vesting and stock holding requirements and compensation recovery (clawback) policy

 

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Target annual compensation mix

At least 70% of the annual target compensation opportunity for each Named Executive is equity-based to incentivize a long-term focus and align their interests with those of our shareholders.

 

 

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The 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, providing greater alignment with the interests of our shareholders. The foregoing chart compares the fiscal year 2017 target compensation levels for our Named Executives to the average of these amounts for the named executive officers of the companies in our compensation peer group (identified in Section 3 below), using data available in mid-2016 when the Committee conducted our fiscal year 2017 compensation planning.

We strive to meet our objectives while maintaining executive compensation leading practices:

 

 

Best practices

 

•   A stock ownership policy that reinforces the alignment of executive officer and shareholder interests

 

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

 

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

 

•   An independent compensation consultant that advises the Compensation Committee

 

•   Responsible management of equity compensation

 

•   No stock option awards

 

•  No excessive perquisites (no executive-only club memberships, medical benefits, or 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

Paying competitively

We compete with global information technology and large market capitalization U.S. companies and smaller, high-growth technology businesses for senior executive talent. We continually monitor the marketplace and the compensation levels and pay practices of other companies to respond to marketplace changes.

To ensure that our Board of Directors 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. Because other companies actively recruit our executive officers to fill CEO and other senior leadership positions, we also supplement market information with data on external opportunities potentially available to our executive officers.

While this market analysis and supplemental data inform the decisions of the independent Board members and the Compensation Committee on the range of compensation opportunities, we do not tie executive officer compensation to specific market percentiles.

 

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In assessing our fiscal year 2017 executive compensation design, we considered pay practices at the largest technology and general industry companies in terms of market capitalization, revenue, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) that were comparable to Microsoft. We selected this peer group because we believe these companies are led by executives with similarly complex roles and responsibilities. We 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 2017, this compensation peer group comprised these companies.

 

    Peer group used for fiscal year 2017 pay analysis    
 

Technology

    

General industry

     
 

•  Alphabet

•  Amazon

•  Apple

•  Cisco Systems

•  Facebook

 

•  Hewlett-Packard

•  IBM

•  Intel

•  Oracle

•  Qualcomm

  

•  AT&T

•  Chevron

•  Coca-Cola

•  Comcast

•  ExxonMobil

 

•  General Electric

•  Johnson & Johnson

•  Merck

•  PepsiCo

•  Pfizer

 

•  Procter & Gamble

•  Verizon

•  Wal-Mart

•  Walt Disney

 

In March 2016, when we determined the compensation peer group for fiscal year 2017, Microsoft was significantly larger than the median of these companies based on the three primary screening criteria.

 

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Technology labor market

Our businesses operate in very dynamic environments. The technology labor market is hyper-competitive with demand growing faster than the supply of technical talent, resulting in significant increases in compensation at all employee levels at the companies with whom we compete for 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 we expect to continue to adjust our approach to executive compensation to respond to market conditions.

Scope of executive roles

Our executive officers must perform demanding roles leading large global organizations, and overseeing complex and interdependent strategic initiatives. Often, our roles involve greater scope and complexity than similar positions at the companies in the compensation peer group.

Establishing compensation opportunities

In September 2016, Mr. Nadella recommended to the Compensation Committee fiscal year 2017 total target annual compensation opportunities for each of the other executive officers. In making these recommendations, he considered an array of information that, depending on the executive officer, included:

 

  Role and responsibilities

 

  Market data from our compensation peer group and other competitive market information reflecting the scale and scope of his or her role. For this purpose, the compensation peer group was tailored to comprise companies that represent the function the executive officer oversees.

 

  The relationship of annual target compensation among internal peers

 

  Information about the market for executive talent gained through monitoring external market pay practices, our experience recruiting for executive positions at Microsoft, and efforts by others to recruit our executive officers

 

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In determining target pay, the Compensation Committee considers the range of compensation for executives performing similar roles at companies in our compensation peer group. Base salaries and incentive opportunities may be set below or above median amounts because of factors like expertise, performance, and potential for future contributions. Applying its independent judgment, the Committee formulated a total annual target compensation amount for each pay component for each executive officer based on Mr. Nadella’s recommendation, the factors Mr.  Nadella considered when formulating his recommendations, and input from the Committee’s compensation consultant, Semler Brossy.

Independent compensation consultant

The Compensation Committee retains Semler Brossy, an executive compensation consulting firm that is independent of management, to assist and advise the Committee in its review and oversight of our executive compensation program. See Part 2 – “Board of Directors – Compensation Committee – Compensation consultant” for more information on Semler Brossy’s role and independence as an advisor to the Committee.

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. Besides the standard benefits offered to all U.S. employees, we maintain a non-qualified 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 in the U.S 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 2017, we provided no executive-only perquisites or other personal benefits to our Named Executives other than matching gifts made to charitable organizations.

Limited 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.

Our Named Executives may be eligible for additional vesting of their outstanding stock awards following termination of employment on the same terms as our other employees. All employees who retire from Microsoft in the United States after (a) age 65 or (b) age 55 with 15 years of service are eligible for the continuation of vesting of outstanding stock awards granted at hire or at the time of 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, 2017, only Mr. Smith was retirement-eligible, and the value of his retirement-based stock award vesting on that date was $13,665,441 (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 stock awards. Mr. Nadella’s long-term performance stock award (“LTPSA”), which was granted to him in connection with his appointment as CEO, would vest for the target number of shares upon his death or total and permanent disability. The value of our Named Executives’ stock awards vesting at a June 30, 2017 termination of employment due to death or total and permanent disability was: Mr. Nadella – $190,508,045; Ms. Hood – $30,786,344; Mr. Courtois – $23,956,759; Ms. Johnson – $16,225,915; and Mr. Smith – $36,059,696.

 

Retirement vesting

 

Our U.S. Named Executives may be eligible for additional vesting of their outstanding stock awards upon termination of employment on the same terms as our other employees. All employees who retire from Microsoft in the United States on or after (a) age 65 or (b) age 55 with 15 years of service are eligible for the continuation of vesting of outstanding stock awards granted at hire or at the time of performance review, if the award was granted over one year before the date of retirement.

 

 

Age 65 OR

age 55 with

15

years of service

 

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In addition, our Named Executives are eligible to participate in the Microsoft Senior Executive Severance Benefit Plan (the “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 the Company. 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, 2017.

 

Named Executive

   Amount
payable
 

Satya Nadella

     $59,027,6971  

Amy E. Hood

     $21,528,797  

Jean-Philippe Courtois

     $13,922,968  

Margaret L. Johnson

     $11,275,183  

Bradford L. Smith2

     $27,419,530  
(1) Includes amounts payable under the Severance Plan, plus stock vesting under Mr. Nadella’s LTPSA award ($14,992,275).
(2) Includes $13,754,089 in Severance Plan benefits in addition to Mr. Smith’s retirement-based stock award vesting of $13,665,441.

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 comprehensive, ‘no fault’ executive compensation recovery “clawback” policy. Under this policy, the 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. The Committee may use its judgment in determining the amount to be recovered where the incentive compensation was awarded subjectively. The 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 http://aka.ms/policiesandguidelines.

 

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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 the 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 3 to 10 times base salary. Each covered executive must retain 50% of all net shares (post-tax) that vest until achieving his or her minimum share ownership requirement. The ownership requirements will increase for fiscal year 2018, as follows.

 

Named Executive

   Share ownership
requirement as of
June 30, 2017
    

Share ownership

requirement as of

June 30, 2018

 

Satya Nadella

   10x base salary        15x base salary  

Amy E. Hood

   3x base salary        8x base salary  

Jean-Philippe Courtois

   3x base salary        8x base salary  

Margaret L. Johnson

   3x base salary        5x base salary  

Bradford L. Smith

   3x base salary        8x base salary  

In fiscal year 2017, each of our Named Executives complied with our stock ownership policy. Our stock ownership policy is available on our website at http://aka.ms/policiesandguidelines.

Derivatives trading, hedging, and pledging prohibited

Our 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.

Deductibility of executive compensation

Fiscal year 2017 Incentive Plan compensation awarded to our Named Executives was generally intended to be deductible performance-based compensation under Section 162(m) of the Internal Revenue Code (“Section 162(m)”). Section 162(m) imposes an annual deduction limit of $1 million on the amount of compensation paid to each of the chief executive officer and certain other named executive officers. The deduction limit does not apply to performance-based compensation that satisfies the requirements of Section 162(m). Cash and equity awards under the Incentive Plan were subject to one or more performance goals intended to satisfy the requirements of Section 162(m), including, for all fiscal year 2017 awards, a requirement of positive operating income for the performance period. The performance goals were approved by the 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. In structuring compensation for our executive officers, the Committee considers whether compensation will be deductible for federal income tax purposes. Preserving deductibility is not the only goal for our executive compensation program, however, and the Committee retains the discretion to award compensation that is nondeductible. Notwithstanding the foregoing, the SAs and PSAs that vest upon a Named Executive’s termination of employment due to death or disability would not be subject to performance goals, and those shares would not be deductible as performance-based compensation.

 

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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 2017 compensation policies and practices are 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 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:

 

•  Annual cash incentive awards to each executive officer are limited to the lesser of a fixed maximum specified in the Incentive Plan or a fixed percentage of an incentive pool. 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 predetermined 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.

 

•  PSA metrics aligned with our three ambitions further diversify the elements of the program, to minimize the incentive to produce any particular outcome.

 

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

 

•  The majority of incentive plan award value is delivered in shares of Microsoft common stock with a multi-year vesting schedule, which aligns the interests of our executive officers to long-term shareholder interests.

 

•  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.

 

•  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 the 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 3 – “Other compensation policies and information – Strong clawback policy.” In fiscal year 2017 we strengthened this Policy by enhancing the Company’s ability to claw back compensation awarded during the period in which a covered officer committed a significant legal or compliance violation.

Executive officers are subject to our executive stock ownership requirements, described in this Section 3 – “Other compensation policies and information – Robust stock ownership policy.”

Also, in fiscal year 2017 Microsoft created a Sales Incentive Compensation Governance Committee to enhance oversight and governance of our sales incentive programs.

 

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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)

G. Mason Morfit

Sandra E. Peterson

Charles W. Scharf

Padmasree Warrior

 

 

Fiscal year 2017 compensation tables

Summary compensation table

This table contains information about compensation awarded to our Named Executives for the fiscal years ended June 30, 2017, 2016, and 2015. None of our Named Executives received stock options during those years.

 

Name and

principal position

  Year    

Salary

($)

   

Bonus1

($)

   

Stock

awards2

($)

    Non-equity
incentive plan
compensation
3
($)
    All other
compensation
4
($)
   

Total

($)

 

Satya Nadella

 

Chief Executive Officer

and Director

    2017       1,450,000       N/A       11,434,557       7,032,406       97,189       20,014,152  
    2016       1,200,000       4,464,000       12,013,927       N/A       14,104       17,692,031  
    2015       1,200,000       4,320,000       12,761,263       N/A       13,007       18,294,270  

Amy E. Hood

 

Executive Vice President and

Chief Financial Officer

    2017       852,917       N/A       7,015,071       3,624,896       89,260       11,582,144  
    2016       731,250       2,304,000       7,326,650       N/A       12,730       10,374,630  
    2015       675,985       1,978,000       6,090,606       N/A       10,372       8,754,963  

Jean-Philippe Courtois5

 

Executive Vice President,

President, Global Sales,

Marketing and Operations

    2017       751,054       N/A       14,735,4646       2,762,884       45,214       18,294,616  

Margaret L. Johnson

 

Executive Vice President,

Business Development

    2017       715,000       N/A       3,907,922       2,168,795       89,238       6,880,955  
    2016       704,167       1,909,000       4,083,212       N/A       20,111       6,716,490  
    2015       539,204       3,795,000       10,180,626       N/A       18,765       14,533,595  

Bradford L. Smith

 

President and Chief

Legal Officer

    2017       785,833       N/A       6,193,370       3,241,543       98,989       10,319,735  
    2016       704,167       1,972,000       5,915,948       N/A       18,497       8,610,612  
    2015       650,000       1,300,000       4,833,835       N/A       16,847       6,800,682  
(1) Includes Incentive Plan discretionary cash incentives for fiscal years 2016 and 2015 and, for Ms. Johnson, a $3,000,000 signing bonus payable over two years – $2,500,000 in fiscal year 2015 and $500,000 in fiscal year 2016.
(2) Values for SAs and PSAs in this column are calculated using the assumptions set forth in the Grants of plan-based awards table. PSA values are included in this column to the extent the PSAs have a grant date in the fiscal year. Because the grant date occurs when PSA performance targets are set, this column includes values in 2017 of 33.33% of the fiscal year 2017 PSAs and 16.66% of the fiscal year 2016 PSAs, and values in 2016 of 66.68% of the fiscal year 2016 PSAs. The 2016 PSA values reported for fiscal year 2016 include the 50% of the PSAs with 3-year targets and 33.36% of the remainder of the PSAs, which had annual targets. Assuming that the highest level of performance conditions will be achieved, the values of PSAs with a grant date in fiscal year 2017 or 2016 are: for fiscal year 2017, Mr. Nadella, $10,639,556, Ms. Hood $6,274,167, Mr. Courtois, $3,287,828, Ms. Johnson, $3,782,271, and Mr. Smith, $5,556,198; for fiscal year 2016, Mr. Nadella, $13,825,602, Ms. Hood $7,645,994, Ms. Johnson, $5,236,964, and Mr. Smith, $6,808,098.
(3) Includes Incentive Plan cash incentives for fiscal year 2017.

 

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(4) Details about the amounts in the “All other compensation” column are set forth in the table below.

All other compensation

None of our Named Executives received reimbursements for relocation expenses or tax-gross-up payments in the last three fiscal years.

 

Named Executive

   Year     

Company
contributions
to retirement
plans
A

($)

    

Broad-based

plan benefitsB

($)

    

Matching
charitable
gifts
C

($)

    

OtherD

($)

  

Total

($)

 

Satya Nadella

     2017        9,000        3,189        85,000             97,189  

Amy E. Hood

     2017        9,000        1,260        79,000             89,260  

Jean-Philippe Courtois

     2017        7,311        1,718               36,185      45,214  

Margaret L. Johnson

     2017        9,000        2,488        77,750             89,238  

Bradford L. Smith

     2017        9,000        4,989        85,000             98,989  
  (A) Includes 401(k) plan matching contributions and, for Mr. Courtois, the employer contribution to a mandatory supplemental defined contribution plan for eligible French employees.
  (B) Includes (i) life insurance premiums, and (ii) athletic club membership and payments in lieu of athletic club membership, available to substantially all our U.S.-based employees.
  (C) Includes matching charitable contributions above match level available to all U.S. employees under our corporate giving program.
  (D) Includes tax assistance allowance of $1,760, car allowance that includes business and personal use of $18,657, and profit sharing mandated by French law of $15,768, all under programs generally offered to senior managers in Europe.
(5) Amounts paid in Euros have been converted to U.S. dollars using the average daily exchange rate from July 1, 2016 to June 30, 2017 of 1 to $1.090.
(6) Mr. Courtois’s stock awards for fiscal year 2017 include his fiscal year 2016 annual SAs, his fiscal year 2017 SAs and PSAs, and a one-time promotion stock award with reported value of $8,603,644 made when he was appointed President, Microsoft Global Sales, Marketing, and Operations and an executive officer, recognizing the expanded scope of his responsibilities. The values for these awards are set forth in the “Grants of plan-based awards” table below.

 

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Grants of plan-based awards

This table provides information on grants of awards under any plan to the Named Executives related to the fiscal year ended June 30, 2017.

 

Named

Executive

  Award   Grant Date     Estimated possible payouts
under non-equity incentive plan
awards1
        Estimated future payouts
under equity incentive
plan awards2
   

All other

stock
awards

(#)

    Grant
date fair
value of
stock
awards3
($)
 
      Threshold
($)
    Target
($)
    Maximum
($)
        Threshold
(#)
    Target
(#)
    Maximum
(#)
     

Satya Nadella

  2017 Cash Incentive             0       4,350,000       8,700,000                                              
 

2017 PSA

    9/20/2016                                   2,393       43,509       130,526               2,814,310  
 

2016 PSA

    9/20/2016                                   6,317       25,266       101,064               1,670,312  
   

2017 Stock Award

    9/20/2016                                                           130,526       6,949,935  

Amy E. Hood

  2017 Cash Incentive             0       2,132,292       4,264,583                                              
 

2017 PSA

    9/19/2016                                   1,484       26,975       80,926               1,748,555  
 

2016 PSA

    9/19/2016                                   3,494       13,973       55,892               925,686  
   

2017 Stock Award

    9/19/2016                                                           80,926       4,340,830  

Jean-Philippe

Courtois

  2017 Cash Incentive             0       1,674,475       3,348,950                                              
 

2017 PSA

    12/21/2016                                   1,197       21,754       65,263               1,643,914  
 

2017 Stock Award

    12/21/2016                                                           65,263       3,934,080  
 

2016 Stock Award

    9/19/2016                                                           10,443       553,826  
   

Promotion Stock Award4

    7/26/2016                                                           158,563       8,603,644  

Margaret L.

Johnson

  2017 Cash Incentive             0       1,430,000       2,860,000                                              
 

2017 PSA

    9/19/2016                                   798       14,503       43,509               940,092  
 

2016 PSA

    9/19/2016                                   2,393       9,570       38,280               634,029  
   

2017 Stock Award

    9/19/2016                                                           43,509       2,333,801  

Bradford L.

Smith

  2017 Cash Incentive             0       1,964,583       3,929,166                                              
 

2017 PSA

    9/19/2016                                   1,309       23,785       71,354               1,541,734  
 

2016 PSA

    9/19/2016                                   3,111       12,442       49,768               824,243  
   

2017 Stock Award

    9/19/2016                                                           71,354       3,827,393  
(1) These columns represent the threshold, target, and maximum cash incentives for fiscal year 2017. Actual fiscal year 2017 cash incentives are reported in the Summary compensation table.
(2) These columns represent the threshold, target, and maximum shares for the PSAs with a grant date in fiscal year 2017. Because under FASB Accounting Standards Codification Topic 718 (“ASC 718”), there is no grant date with respect to future periods for which a performance target has not been set, the reported number of shares is calculated as the target shares for the portion of the PSAs for which performance targets were set in fiscal year 2017 (33.33% of the 2017 PSAs and 16.66% of the 2016 PSAs). The threshold is calculated as if the threshold of only the least weighted metric (50% of 11.00% of the 2017 PSAs and 50% of 8.33% of the 2016 PSAs) is met. The maximum is calculated assuming all maximum targets were met and the relative TSR multiplier was fully earned.
(3) Values for SAs in this column are calculated using the grant date fair value under ASC 718 based on the market price as of the date of grant of common stock awarded, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. Values for PSAs in this column are calculated using a Monte Carlo simulation valuation performed as of the date of grant by an independent third party.
(4) This award was made when Mr. Courtois was appointed President, Microsoft Global Sales, Marketing, and Operations and an executive officer, recognizing the expanded scope of his responsibilities.

 

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Outstanding equity awards at June 30, 2017

This table provides information about unvested stock awards held by the Named Executives on June 30, 2017.

 

    Stock awards  

Named Executive

 

Number of shares
or units of stock
that have not
vested
1

(#)

    

Market value of
shares or units of
stock that have
not vested
2

($)

    

Equity incentive plan
awards: number of
unearned shares,
units, or other rights
that have not vested
1

(#)

    

Equity incentive plan
awards: market or
payout value of
unearned shares,
units, or other rights
that have not
vested
2

($)

 

 

Satya Nadella

 

    681,609        46,983,308        619,898        42,729,569  

 

Amy E. Hood

 

    281,836        19,426,955        96,872        6,677,387  

 

Jean-Philippe Courtois

 

    282,289        19,458,181        21,754        1,499,503  

 

Margaret L. Johnson

 

    134,443        9,267,156        62,378        4,299,716  

 

Bradford L. Smith

    377,102        25,993,641        86,022        5,929,496  

 

(1) The following table shows the dates on which the awards in the outstanding equity awards table vest and the corresponding number of shares, subject to continued employment through the vest date (or termination due to eligible retirement, death or disability). PSAs with a grant date in fiscal years 2017 or 2016 are reported, assuming payout at target award levels. Mr. Nadella’s LTPSA is reported at the minimum award level.

 

       Number of shares vesting  

Vesting date

    

Satya

Nadella

      

Amy E.

Hood

      

Jean-

Philippe
Courtois

      

Margaret L.

Johnson

      

Bradford L.

Smith

 

 

7/26/2017

 

       0          0          26,427          0          0  

 

8/15/2017

 

       117,962          0          0          0          78,641  

 

8/29/2017

 

       128,777          63,113          7,352          27,515          64,941  

 

8/30/2017

 

       0          0          12,157          0          0  

 

8/31/2017

 

       55,380          34,909          8,444          18,058          29,040  

 

12/21/2017

 

       0          0          16,315          0          0  

 

1/26/2018

 

       0          0          26,427          0          0  

 

2/28/2018

 

       39,064          24,793          22,103          12,619          20,120  

 

6/25/2018

 

       0          29,741          0          0          0  

 

7/26/2018

 

       0          0          26,427          0          0  

 

8/15/2018

 

       117,962          0          0          0          78,642  

 

8/29/2018

 

       72,640          34,669          5,503          27,515          27,515  

 

8/30/2018

 

       0          0          4,671          0          0  

 

8/31/2018

 

       165,453          94,690          16,603          60,494          82,359  

 

1/26/2019

 

       0          0          26,427          0          0  

 

2/3/2019

 

       150,000A          0          0          0          0  

 

2/28/2019

 

       39,063          24,792          16,600          12,620          20,121  

 

7/26/2019

 

       0          0          26,428          0          0  

 

8/31/2019

 

       82,574          51,769          38,356          27,122          43,906  

 

2/3/2020

 

       150,000A          0          0          0          0  

 

2/29/2020

 

       16,316          10,116          10,857          5,439          8,919  

 

8/31/2020

 

       16,316          10,116          10,857          5,439          8,920  

 

2/3/2021

 

       150,000A          0          0          0          0  

 

2/28/2021

 

       0          0          1,044          0          0  

 

8/31/2021

 

       0          0          1,045          0          0  

 

Total

 

       1,301,507          378,708          304,043          196,821          463,124  
  (A) Represents vest of Mr. Nadella’s LTPSA at the minimum award level.
(2) The market value is the number of shares shown in the table multiplied by $68.93, the closing market price of Microsoft common stock on June 30, 2017.

 

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Stock vested

This table provides information, on an aggregate basis, about stock awards that vested during the fiscal year ended June 30, 2017 for each of the Named Executives.

Microsoft has not granted stock options, other than options substituted in acquisitions, since 2003. No Named Executives held any Microsoft stock options during the fiscal year.

 

    Stock awards  

Named Executive

 

Number of shares

acquired on vesting

(#)

      

Value realized

on vesting1

($)

 

 

Satya Nadella

 

    362,031          21,126,124  

 

Amy E. Hood

 

    161,289          9,835,282  

 

Jean-Philippe Courtois

 

    126,201          7,679,949  

 

Margaret L. Johnson

 

    70,403          4,260,343  

 

Bradford L. Smith

 

    208,011          12,125,801  
(1) The value realized on vesting is calculated by multiplying the number of shares shown in the table by the market value of the shares on the vesting date.

Non-qualified deferred compensation

This table provides information about Named Executives’ earnings and balances under our U.S. non-qualified Deferred Compensation Plan in fiscal year 2017. Microsoft does not contribute to the Deferred Compensation Plan, and in fiscal year 2017 there were no contributions or withdrawals by, or distributions to, any Named Executive.

 

Named Executive

  

Aggregate

earnings in

fiscal year 20171

($)

    

Aggregate

balance at

June 30, 20171

($)

 

 

Satya Nadella

 

     21,441        182,011  

 

Amy E. Hood

 

     0        0  

 

Jean-Philippe Courtois

 

     0        0  

 

Margaret L. Johnson

 

     0        0  

 

Bradford L. Smith

 

     0        0  
(1) These amounts have not been included in the Summary compensation table for fiscal year 2017 or for previous years.

Microsoft’s Deferred Compensation Plan is unfunded and unsecured. It allows participants to defer a specified percentage of their base salary (up to 75%), and/or eligible incentive cash payments (up to 100%). Participation in the Deferred Compensation Plan is limited to U.S. senior managers, including our U.S. Named Executives. Microsoft does not contribute to the Deferred Compensation Plan or guarantee any returns on participant contributions. Our Named Executives made no contributions in fiscal year 2017.

When an employee elects to participate in the Deferred Compensation Plan, the employee must specify the percentage of base salary and/or cash incentive award to be deferred, and the timing of distributions. No withdrawals are permitted prior to the previously elected distribution date, other than “hardship withdrawals” as permitted by applicable law. Amounts deferred under the Deferred Compensation Plan are credited with hypothetical investment earnings based on participant investment elections made from among investment options available under the plan.

 

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Equity compensation plan information

This table provides information about shares of Microsoft stock that may be issued under our equity compensation plans approved by shareholders and plans not approved by shareholders (if any) as of June 30, 2017. Under the 2001 Stock Plan, no option or stock appreciation rights may be repriced, replaced, regranted through cancellation, repurchased for cash or other consideration, or modified without shareholder approval (except in connection with a change in our capitalization), if the effect would be to reduce the exercise price for the share underlying the award.

 

Plan category

  

Number of securities

to be issued upon

exercise of outstanding
options, warrants,

and rights1

      

Weighted average

exercise price

of outstanding

options, warrants,

and rights2

      

Number of securities

remaining available

for future issuance

under equity

compensation plans3

 

 

Equity compensation plans approved by security holders

 

  

 

 

 

202,871,625

 

 

    

 

 

 

18.3634

 

 

    

 

 

 

256,282,566

 

 

 

Equity compensation plans not approved by security holders

 

  

 

 

 

0

 

 

    

 

 

 

N/A

 

 

    

 

 

 

0

 

 

 

Total

 

  

 

 

 

202,871,6254

 

 

    

 

 

 

18.3634

 

 

    

 

 

 

256,282,5664

 

 

(1) Represents shares issuable upon vesting of outstanding stock awards granted under the 2001 Stock Plan; includes shares under PSAs and Mr. Nadella’s LTPSA that will vest if target performance levels are achieved.
(2) The weighted average exercise price does not take into account the shares issuable upon vesting of outstanding stock awards, which have no exercise price.
(3) Includes 129,257,595 shares remaining available for issuance as of June 30, 2017 under the Employee Stock Purchase Plan.
(4) As of the record date, these numbers were 202,753,969 and 213,430,637, respectively, including 128,909,674 shares remaining available for issuance under the Employee Stock Purchase Plan.

 

 

Compensation Committee interlocks and insider participation

Ms. Warrior, and Messrs. Morfit, Scharf, and Stanton were members of the Compensation Committee during fiscal year 2017. All members of the Committee were independent directors, and no member was an employee or former employee of Microsoft. During fiscal year 2017, none of our executive officers served on the compensation committee (or its equivalent) or board of directors of another entity where one of our Committee members was an executive officer.

 

 

Stock ownership information

This table describes, as of September 29, 2017, the number of shares of our common stock beneficially owned by our directors and all executive officers, together with additional underlying shares or stock units as described in Notes 2 through 4 to the table.

In computing the number and percentage of shares beneficially owned by each person, we have included any shares of our common stock that could be acquired within 60 days of September 29, 2017 by options, vesting stock awards, or receiving shares credited under the Deferred Compensation Plan for Non-Employee Directors. These shares, however, are not counted in computing the percentage ownership of any other person.

 

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Beneficial ownership

          

Name

  

Common

stock1,2

      

Percent of

common

stock

   

Additional

underlying shares

or stock units3,4

       Total  

 

William H. Gates III

     102,992,9345          1.3%       0          102,992,934  

 

Reid G. Hoffman

     15,8056          *       1,867          17,672  

 

Hugh F. Johnston

     2437          *       0          243  

 

Teri L. List-Stoll

     14,376          *       0          14,376  

 

G. Mason Morfit

     9,013,4748          *       0          9,013,474  

 

Charles H. Noski

     103,2569          *       0          103,256  

 

Helmut Panke

     51,294          *       0          51,294  

 

Sandra E. Peterson

     9,504          *       0          9,504  

 

Charles W. Scharf

     36,161          *       0          36,161  

 

John W. Stanton

     77,41710          *       0          77,417  

 

John W. Thompson

     33,46211          *       45,293          78,755  

 

Padmasree Warrior

     8,143          *       0          8,143  

 

Satya Nadella

     656,241          *       2,279,798          2,936,039  

 

Amy E. Hood

     220,336          *       246,005          466,341  

 

Jean-Philippe Courtois

     597,75412          *       278,063          875,817  

 

Margaret L. Johnson

     150,39913          *       122,306          272,705  

 

Bradford L. Smith

     593,248          *       259,315          852,563  

 

Executive officers and directors as a group (19 people)

     114,784,90614          1.49     N/A          N/A  
* Less than 1%
(1) Beneficial ownership represents sole voting and investment power.
(2) For directors, includes shares credited under the Deferred Compensation Plan for Non-Employee Directors that may be distributable within 60 days of September 29, 2017: Ms. List-Stoll, 10,978; Mr. Noski, 91,076; Ms. Peterson, 9,504; Mr. Thompson, 5,117; and Ms. Warrior, 1,827.
(3) For directors, includes shares credited under the Deferred Compensation Plan for Non-Employee Directors that are not payable within 60 days following termination of Board service: Mr. Hoffman, 1,867; Mr. Thompson, 45,293.
(4) For Named Executives, includes (i) unvested stock awards that do not vest within 60 days of September 29, 2017, subject to continued employment at the time of each vest: Mr. Nadella, 479,798; Ms. Hood, 246,005; Mr. Courtois, 278,063; Ms. Johnson, 122,306; and Mr. Smith, 133,477, (ii) 1,800,000 shares payable to Mr. Nadella under his LTPSA at target performance, and (iii) 125,838 shares that would vest if Mr. Smith retires from Microsoft (assuming PSAs are earned at 100% of target).
(5) Excludes 424,816 shares held by Mr. Gates’ spouse, as to which he disclaims beneficial ownership.
(6) Includes 15,805 shares held by a family trust.
(7) Excludes 68 shares held by a family trust as to which Mr. Johnston disclaims beneficial ownership
(8) Includes 8,131,525 shares that are directly beneficially owned by ValueAct Capital Master Fund, L.P. and may be deemed to be indirectly beneficially owned by (i) VA Partners I, LLC as General Partner of ValueAct Capital Master Fund, L.P., (ii) ValueAct Capital Management, L.P. as the manager of ValueAct Capital Master Fund, L.P., (iii) ValueAct Capital Management, LLC as General Partner of ValueAct Capital Management, L.P., (iv) ValueAct Holdings, L.P. as the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and as the majority owner of the membership interests of VA Partners I, LLC and (v) ValueAct Holdings GP, LLC as General Partner of ValueAct Holdings, L.P. Also includes 881,949 shares directly beneficially owned by ValueAct Co-Invest Master Fund, L.P. and may be deemed to be indirectly beneficially owned by (i) VA Partners I, LLC as General Partner of ValueAct Capital Master Fund, L.P., (ii) ValueAct Capital Management, L.P. as the manager of ValueAct Capital Master Fund, L.P., (iii) ValueAct Capital Management, LLC as General Partner of ValueAct Capital Management, L.P., (iv) ValueAct Holdings, L.P. as the sole owner of the limited partnership interests of ValueAct Capital Management, L.P. and the membership interests of ValueAct Capital Management, LLC and as the majority owner of the membership interests of VA Partners I, LLC and (v) ValueAct Holdings GP, LLC as General Partner of ValueAct Holdings, L.P. Mr. Morfit is a member of the management board of ValueAct Holdings GP, LLC. Each reporting person listed above disclaims beneficial ownership of the reported securities except to the extent of its pecuniary interest therein.
(9) Includes 12,180 shares held by a family trust.
(10) Includes 7,243 shares held by a family trust.
(11) Includes 27,279 shares held by a family trust.
(12) Excludes an aggregate of 257,532 shares held by contrats d’assurance vie and an aggregate of 49,200 shares held by contrats de capitalization as to which Mr. Courtois disclaims beneficial ownership.
(13) All 150,399 shares held by a family trust.
(14) Includes 120,369 shares credited under the Deferred Compensation Plan for Non-Employee Directors that may be issued within 60 days of September 29, 2017.

 

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Principal shareholders

This table lists all entities that are the beneficial owner of more than 5% of Microsoft common stock.

 

Name

  

Voting common stock and

nature of beneficial

ownership as of 9/29/2017

      

Percent of

class to be voted

at the meeting

 

The Vanguard Group, Inc.

100 Vanguard Blvd., Malvern, PA 19355

 

     525,395,707¹          6.75%  

 

BlackRock, Inc.

55 East 52nd Street, New York, NY 10055

     468,087,659²          6.0%  

 

(1) All information about The Vanguard Group, Inc. is based on a Schedule 13G/A filed with the SEC on February 10, 2017. The Vanguard Group, Inc. reported that it has sole voting power with respect to 12,025,950 shares of common stock, sole dispositive power with respect to 512,113,007 shares of common stock, shared voting power of 1,362,880 shares of common stock, and shared dispositive power of 13,282,700 shares of common stock.
(2) All information about BlackRock, Inc. is based on a Schedule 13G/A filed with the SEC on January 25, 2017. BlackRock, Inc. reported that it has sole voting power with respect to 398,420,171 shares of common stock, sole dispositive power with respect to 467,969,646 shares of common stock, and shared voting and shared dispositive power of 118,013 shares of common stock.

 

 

Section 16(a) – beneficial ownership reporting compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers, and persons who own more than 10% of our common stock to file reports of their ownership and changes in ownership of our common stock with the SEC. Our employees prepare these reports for ten of our directors and all of our executive officers using information obtained from them and from Microsoft’s records. We believe our directors and executive officers met all applicable Section 16(a) requirements during fiscal year 2017.

 

 

Proposal 3: Advisory vote on frequency of advisory vote on executive compensation  

 

 

 

 

As required by Section 14A of the Securities Exchange Act of 1934, we are seeking your advisory vote on how often the Company should hold a say-on-pay vote. You may specify whether you prefer the vote to occur every year, two years, or three years, or may abstain from voting on this proposal. Shareholders will have an opportunity to cast an advisory vote on the frequency of the say-on-pay vote at least every six years.

 

The affirmative vote of a majority of the shares of common stock cast is required to approve this proposal. Although this vote is not binding, the Board will consider the voting results in setting the frequency of future say-on-pay votes.

 

   
   

 

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The Board recommends that future say-on-pay votes occur every year.

When shareholders last voted on the frequency of the say-on-pay vote in 2011, the Board recommended an annual vote, which shareholders supported with 84% of votes cast. We continue to believe there are valid arguments for a variety of vote frequencies depending on a company’s specific circumstances. Nevertheless, considering input we have received in our shareholder outreach and the preference evident from voting results at other large companies, we recommend shareholders vote to hold the say-on-pay vote every year. We believe an annual vote promotes accountability and transparency in view of recent changes to our executive compensation programs and the continuing evolution of our business.

Although the vote is non-binding, the Board will consider the vote results in determining the frequency of future say-on-pay votes. The Company will announce its decision on the frequency of say-on-pay votes in a Form 8-K filed with the SEC no later than 150 days after the Annual Meeting. In the future, the Board may change the vote frequency based on the nature of the Company’s compensation programs, input from our shareholders, and the Board’s views on the best way to obtain meaningful shareholder input.

 

2017 PROXY STATEMENT  57


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4. Audit Committee matters

 

 

Proposal 4:

Ratify Deloitte & Touche LLP as independent auditor for fiscal year 2018

 

 

 

 

The Audit Committee has selected Deloitte & Touche as Microsoft’s independent auditor for fiscal year 2018. The Board asks shareholders to ratify that selection. Although current law, rules, and regulations, and the charter of the Audit Committee, require the Audit Committee to engage, retain, and supervise Microsoft’s independent auditor, the Board considers the selection of the independent auditor to be an important matter of shareholder concern and is submitting the selection of Deloitte & Touche for ratification by shareholders as a matter of good corporate practice. The Board considers the selection of Deloitte & Touche as Microsoft’s independent auditor for fiscal year 2018 to be in the best interests of Microsoft and its shareholders.

 

The affirmative vote of a majority of the shares of common stock is required to approve this proposal. If the selection of Deloitte & Touche is not ratified, the Audit Committee will consider the result a recommendation to consider selection of a different firm.

 

   
   

 

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The Board of Directors recommends a vote FOR the ratification of the independent auditor.

 

 

Audit Committee report

Charter and responsibilities

The Audit Committee operates under a written charter adopted by the Board of Directors. It is available on our website at http://aka.ms/policiesandguidelines. The charter, which was last amended effective July 1, 2017, includes a calendar that outlines the Committee’s duties and responsibilities. The Committee reviews the charter and calendar annually and works with the Board of Directors to amend them as appropriate to reflect the evolving role of the Committee.

The Board of Directors has the ultimate authority for effective corporate governance, including oversight of the management of Microsoft. The Audit Committee assists the Board in fulfilling its responsibilities by overseeing the accounting and financial reporting processes of Microsoft, the audits of Microsoft’s consolidated financial statements and internal control over financial reporting, the qualifications and performance of the independent registered public accounting firm engaged as Microsoft’s independent auditor, and the performance of Microsoft’s internal auditor.

The Audit Committee relies on the expertise and knowledge of management, the internal auditor, and the independent auditor in carrying out its oversight responsibilities. Management is responsible for the preparation, presentation, and integrity of Microsoft’s consolidated financial statements, accounting and financial reporting principles, internal control over financial reporting, and disclosure controls and procedures designed to ensure compliance with accounting standards, applicable laws, and regulations. Management is also responsible for objectively reviewing and evaluating the adequacy, effectiveness, and quality of Microsoft’s system of internal control. Microsoft’s independent auditor, Deloitte & Touche, is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States (“GAAP”). The independent auditor is also responsible for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Fiscal year 2017 activity

During fiscal year 2017, the Audit Committee fulfilled its duties and responsibilities as outlined in the charter and the accompanying calendar. The Committee meets twice each quarter; once in connection with quarterly Board meetings and once to review the quarterly Forms 10-Q and annual Form 10-K. In addition, the Committee meets as needed to address emerging accounting, compliance, or other matters or for educational training. Specifically, the Committee:

 

  Reviewed and discussed with management and the independent auditor Microsoft’s quarterly earnings press releases, consolidated financial statements, and related periodic reports filed with the SEC