DEF 14A
Table of Contents

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. __ )

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Microsoft Corporation

 

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Table of Contents

 

Notice of Annual Shareholders Meeting and

Proxy Statement 2020

 

                                                           
  December 2, 2020   Virtual Meeting Site:  
  8:00 a.m. Pacific Time   www.virtualshareholdermeeting.com/MSFT20  

 

 

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“We recognize the responsibility

we have to ensure the technology

we build is always inclusive,

trusted, promotes fundamental

rights, and is creating a more

sustainable world.”

 

Satya Nadella, CEO

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

 

     

 

 


    Fiscal Year 2020 Business Performance    

 

     
     
   
   

$143.0 billion

 

 

$53.0 billion

 

 

$44.3 billion

 

 

$5.76

 

   
   

Revenue

(up 14%)

 

Operating income

(up 23%)

 

Net income

(up 13% GAAP and 20% non-GAAP)

 

Diluted earnings per share

(up 14% GAAP and 21% non-GAAP)

   
   

 

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

 

   

 

   

 

 

    Focus for Societal Impact    

 

 

 

   
     

Fundamental to Microsoft’s mission is realizing our enormous opportunities to create technology that benefits everyone on the planet, as well as the planet itself. As we think about our societal impacts, our current areas of focus include:

   

Trust in

technology

 

Inclusive

economic growth

 

Fundamental

rights of people

 

 

Sustainability

 

   

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    Note About Forward-Looking Statements    

 

   
     
   

This Proxy Statement includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the Proxy Summary and Part 2 – Named Executive Officer Compensation. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Forms 10-K and 10-Q. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. 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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Letter from our CEO

October 19, 2020

Dear Shareholder,

On behalf of the Board of Directors, it is our pleasure to invite you to the 2020 Annual Shareholders Meeting of Microsoft Corporation (“Annual Meeting”), on December 2, 2020, beginning at 8:00 a.m. Pacific Time. This year’s Annual Meeting will be held in a virtual format through a live webcast. We will provide the webcast of the Annual Meeting at www.virtualshareholdermeeting.com/MSFT20. In addition, you will have the option to view the Annual Meeting through Microsoft Teams at www.microsoft.com/investor. A transcript with video and audio of the entire Annual Meeting will be available on the Microsoft Investor Relations website after the meeting. For further information on how to participate in the meeting, please see Part 5 – Information About the Meeting on page 70 in this Proxy Statement.

The Notice of 2020 Annual Shareholders Meeting and this Proxy Statement contain details of the business to be conducted during the Annual Meeting.

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

This year’s shareholders Q&A session will include questions submitted both live and in advance. You may submit a question in advance of the meeting at www.proxyvote.com after logging in with the control number (“Control Number”) found next to the label for postal mail recipients or within the body of the email sending you the Proxy Statement. Live questions may be submitted online beginning shortly before the start of the Annual Meeting through www.virtualshareholdermeeting.com/MSFT20. We will post questions and answers if applicable to Microsoft’s business on our Investor Relations website shortly after the meeting.

Thank you for your continued investment in Microsoft.

Sincerely,

 

 

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Satya Nadella

Chief Executive Officer

 

 




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Letter from the Board of Directors

 

October 19, 2020

 

Dear Shareholder,

 

This past fiscal year presented unprecedented societal and business challenges on a global scale. We mourn the losses COVID-19 has inflicted on so many individuals and families across the world. We’re humbled and appreciative of the opportunities Microsoft has had to empower our customers and partners to meet the challenges they face and will continue our contributions to help the world respond to and eventually control COVID-19. Throughout the year, the Board and executive leadership of Microsoft collaborated closely to ensure the Company met its commitments to a broad range of stakeholders, including our employees, customers, the communities we operate in, suppliers, and of course our shareholders.

 

This year also included necessary recognition and reckoning with global issues of racial justice in communities across the United States and around the world. The Board worked with Microsoft’s senior leadership team and employees to reflect on, learn, and identify the role Microsoft must play in driving change. In June, the Company announced specific actions to address racial injustice and inequity for the Black and African American community in the U.S. These are focused on three multiyear, sustained efforts: increasing our representation and culture of inclusion, engaging our ecosystem, and strengthening our communities. We know this is not a one-time event and will require ongoing work and focus in the months and years ahead. This year also included significant new sustainability commitments by the Company, including the goal to be carbon negative by 2030.

 

Amidst the challenges, fiscal year 2020 offered another record year for financial performance, and Microsoft delivered strong results for our shareholders, including a return of $35 billion in the form of share repurchases and dividends. We look forward to more opportunity ahead as we remain committed to the long-term interests of our shareholders. In seeking shareholder perspectives, during fiscal year 2020, our Board Chair and members of management engaged with a cross-section of shareholders owning over 48% of Microsoft shares. Shareholder feedback helped inform the continued evolution of our executive compensation program towards more performance-based compensation and to further enhance transparency on compensation decisions and other topics.

 

This year’s Board nominees represent a wide range of backgrounds and expertise. We believe our diversity of experiences, perspectives, and skills contributes to the Board’s effectiveness in managing risk and providing guidance that positions Microsoft for long-term success in a dynamically changing business environment. Of our 12 Board nominees, 11 are independent, which includes our Board Chair and all Committee members. This year, Co-Founder and Technology Advisor Bill Gates stepped down from the Company’s Board of Directors to dedicate more time to his philanthropic priorities. He continues to serve as Technology Advisor to CEO Satya Nadella and other leaders in the Company. The Board has benefited from Bill’s leadership and vision in innumerable ways over the years, and we are grateful for his contributions and insights.

 

This Proxy Statement describes Microsoft’s corporate governance policies and practices that foster the Board’s effective oversight of the Company’s business strategies and practices. We encourage you to view our ESG and Director Video Series to bring this information to life. The videos provide an opportunity for directors to discuss how we approach our roles and responsibilities and share the unique perspectives we bring to the Board, as well as of leaders from across Microsoft discussing our commitments to address key environmental and social challenges. The series is available at https://aka.ms/DirectorVideoSeries.

 

As we look to the year ahead, we see tremendous possibilities for Microsoft to continue to help our customers and partners recover from the challenges of 2020 and we are excited about the opportunities ahead for the Company’s business, shareholder value creation, and positive impacts at a global scale. We appreciate your investment in Microsoft and thank you for the trust you place in us and the opportunity to serve you and our Company as directors.

Sincerely,

 

Your Board of Directors

 




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Notice of 2020 Annual Shareholders Meeting

 

Date     December 2, 2020
Time     8:00 a.m. Pacific Time
Virtual Meeting     This year’s meeting is a virtual shareholders meeting at www.virtualshareholdermeeting.com/MSFT20
Record Date     October 8, 2020. Only shareholders of record at the close of business on the record date are entitled to receive notice of, and to vote at, the Annual Meeting.
Proxy Voting     Make your vote count. Please vote your shares promptly to ensure the presence of a quorum during the Annual Meeting. Voting your shares now via the Internet, by telephone, or by signing, dating, and returning the enclosed proxy card or voting instruction form will save the expense of additional solicitation. If you wish to vote by mail, we have enclosed an addressed envelope with postage prepaid if mailed in the United States. Submitting your proxy now will not prevent you from voting your shares during the Annual Meeting, as your proxy is revocable at your option. We are requesting your vote to:
Items of

Business

   

• Elect the 12 director nominees named in this Proxy Statement

 

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

 

• Ratify the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2021

 

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

 

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

Address of Corporate
Headquarters
    One Microsoft Way, Redmond, WA 98052
Meeting Details     See Part 5 – Information About the Meeting for details.

 

 

Important notice regarding the availability of proxy materials for the Annual Meeting to be held on December 2, 2020. Our 2020 Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/investor.

 

By Order of the Board of Directors

 

 

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Dev Stahlkopf

Secretary

Redmond, Washington

October 19, 2020

 


 

2020 PROXY STATEMENT  i


Table of Contents

Proxy Statement Table of Contents

 

   

Proxy summary

 

    

 

1

 

 

 

  1   

 

 

 

Governance and
our Board of
Directors

 

 
 
 

     

 

Governance, Trust, and Resilience

     6  
     

 

Board of Directors Oversight Roles

     9  
     

 

Our Governance Structure

     10  
     

 

Director Selection and Qualifications

     17  
     

 

Board Composition

     18  
     

 

Our Director Nominees

     20  
           

 

Director Compensation

 

    

 

27

 

 

 

  2

  

 

 

 

Named Executive
Officer
Compensation

 

 
 
 

     

A Letter from the Compensation Committee

     30  
     

Compensation Discussion and Analysis

     31  
     

Section 1 – Performance Update

     31  
     

Section 2 – Executive Compensation Program Enhancements

     34  
     

Section 3 – Pay Setting

     36  
     

Section 4 – Fiscal Year 2020 Compensation Program Design

     40  
     

Section 5 – Fiscal Year 2020 Compensation Decisions

     43  
        

Section 6 – Other Compensation Policies and Information

     49  
        

Compensation Committee Report

     52  
        

Fiscal Year 2020 Compensation Tables

     53  
        

Summary Compensation Table

     53  
        

Grants of Plan-Based Awards

     54  
        

Outstanding Equity Awards at June 30, 2020

     55  
        

Option Exercises and Stock Vested

     56  
        

Nonqualified Deferred Compensation

     56  
        

CEO Pay Ratio

     57  
        

Equity Compensation Plan Information

     57  
        

Compensation Committee Interlocks and Insider Participation

     57  
        

Stock Ownership Information

     58  
                      

Principal Shareholders

 

    

 

59

 

 

 

  3

  

 

 

 

Audit Committee
Matters

 

 
 

     

 

Audit Committee Report

     60  
     

 

Fees Billed by Deloitte & Touche

     62  
     

 

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

     63  
        
        
                      

 


 

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Table of Contents

 

         
  4   

 

 

 

Proposals to be
Voted on During
the Meeting

 

 
 
 

     

 

Management Proposal 1: Election of 12 Directors

     64  
     

 

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

     65  
     

 

Management Proposal 3: Ratification of the Selection of Deloitte & Touche LLP as Independent Auditor for Fiscal Year 2021

     67  
           

 

Shareholder Proposal

 

    

 

67

 

 

 

  5   

 

 

 

Information About
the Meeting

 

 
 

     

 

Date, Time, and Place of Meeting

     70  
     

 

Proxy Materials are Available on the Internet

     70  
     

 

Participating in the Annual Meeting

     70  
     

 

Soliciting Proxies

     71  
     

 

Householding

     71  
     

 

Election of Directors

     71  
     

 

Voting

     72  
        

Shareholders Entitled to Vote; Quorum

     72  
        

Vote Required; Effect of Abstentions and Broker
Non-Votes

     72  
        

Vote Confidentiality

     72  
        

Tabulation of Votes

     72  
        

Where to Find More Proxy Voting Information

     72  
        

Where to Find our Corporate Governance Documents

     73  
        

Proposals by Shareholders for 2021 Annual Meeting

     73  
                      

Other Business

 

    

 

73

 

 

 

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

 

    

 

74

 

 

 

 


 

2020 PROXY STATEMENT  iii


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 this entire Proxy Statement carefully before voting.

 

   

    Annual Shareholders Meeting    

 

   
     

Date: December 2, 2020

 

Time: 8:00 a.m. Pacific Time

 

Meeting Agenda:

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

 

 

Place: www.virtualshareholdermeeting.com/MSFT20

 

 

Record Date: October 8, 2020

 

Mailing Date:

This Proxy Statement was first mailed to shareholders on or about October 20, 2020.

 

 

Voting:

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

 

Voting Matters and Vote Recommendations

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

 

     

Board

Recommends

 

  

See

 Page 

 

 
Management Proposals     

 

    

 

 

 

 

 

Election of 12 Directors

 

  

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FOR

 

  

 

 

  64

 

 

 

Advisory Vote to Approve Named Executive Officer Compensation
(“say-on-pay vote”)

 

  

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FOR

 

  

 

 

  65

 

 

 

Ratification of the Selection of Deloitte & Touche LLP as our Independent Auditor for Fiscal Year 2021

 

  

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FOR

 

  

 

 

  67

 

 

 

Shareholder Proposal     

 

    

 

 

 

 

 

Report on Employee Representation on Board of Directors

 

  

 

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AGAINST

 

  

 

 

  67

 

 

 

 

   

 

    Vote in Advance of the Meeting    

 

              

 

    Vote Online During the Meeting    

 

    
                 
   

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Vote your shares at www.proxyvote.com.

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

 

            

 

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See page 70 in Part 5 –

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

 

 

    
   

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

 

                   
   

 

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

 

 

                         

 



 

2020 PROXY STATEMENT  1


Table of Contents

 

Our Director Nominees

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

The following table provides summary information about each of the 12 director nominees. 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 

Reid G. Hoffman

Partner, Greylock Partners

  53   2017   Yes   1                

Hugh F. Johnston

Vice Chairman, Executive Vice President, and CFO, PepsiCo, Inc.

  59   2017   Yes   0  

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Teri L. List-Stoll

Former Executive Vice President and CFO,

The Gap, Inc.

  57   2014   Yes   1  

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Satya Nadella

CEO and Director, Microsoft Corporation

  53   2014   No   1                

Sandra E. Peterson

Operating Partner, Clayton, Dubilier & Rice, LLC

  61   2015   Yes   1      

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Penny S. Pritzker

Founder and Chairman, PSP Partners, LLC

  61   2017   Yes   0              

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Charles W. Scharf

President, CEO, and Director, Wells Fargo & Company

  55   2014   Yes   1      

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Arne M. Sorenson

President, CEO, and Director, Marriott International, Inc.

  62   2017   Yes   1  

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John W. Stanton

Founder and Chairman, Trilogy Partnerships

  65   2014   Yes   2  

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John W. Thompson

Independent Chair, Microsoft Corporation;

Former CEO, Virtual Instruments Corporation

  71   2012   Yes   1          

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Emma N. Walmsley

CEO and Director, GlaxoSmithKline plc

  51   2019   Yes   1      

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Padmasree Warrior

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

  59   2015   Yes   1      

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AC: Audit Committee

CC: Compensation Committee

GN: Governance and Nominating Committee

RPP: Regulatory and Public Policy Committee

 

 

LOGO   Chair

 
 

 

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LOGO   Financial Expert

 

 



 

         
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Table of Contents

Executive Compensation Advisory Vote

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

 

   

    Pay for Performance    

 

   
     
    We have executed on our pay for performance philosophy.    
   

 

•  56% of the annual target compensation opportunity for our Named Executives was performance-based (on average)

 

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

 

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

 

 

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

 

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

   
   

 

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

   
 

 

   

    Sound Program Design    

 

   
     

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

 

• Provides a competitive total pay opportunity

 

• Delivers a majority of pay based on performance

 

• Consists primarily of stock-based compensation

 

 

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

 

•  Does not encourage unnecessary and excessive risk taking

 

 

   

    Recent Enhancements Incorporate Shareholder Feedback    

 

   
     

In discussing our compensation program throughout 2020 with investors, several key themes emerged in shareholders’ feedback. The Compensation Committee evaluated these themes and implemented enhancements to our fiscal year 2021 compensation program that both respond directly to shareholder input and further increase pay- for-performance alignment at Microsoft. Shareholder feedback and responsive actions taken include:

 

Feedback Themes

 

•  Increase the performance-based component of the annual cash incentive – to further strengthen our CEO’s accountability to achieving results on the objective financial metrics that most closely align with our business strategy

 

•  Shift the mix of our CEO’s equity award to be majority performance-based

 

•  Include a downside adjustment on the PSA payout, so that the TSR multiplier provides both upside and downside exposure for executives

 

•  Investors would benefit from additional disclosure regarding the Compensation Committee’s process to determine incentive compensation results

   

 

Actions Taken

 

•  Increased the weighting of the financial performance portion of the CEO’s annual cash incentive from 50% to 70% for fiscal year 2021, split evenly between Incentive Plan Revenue (35%) and Incentive Plan Operating Income (35%)

 

•  Increased the performance-based portion of our CEO’s equity awards from 50% to 70% for fiscal 2021

 

•  Revised the relative TSR modifier for fiscal year 2021 PSAs to include a downside adjustment on PSA payouts if relative TSR falls below the 40th percentile of the S&P 500

 

•  Increased the disclosure of the goal-setting process and results under PSAs

 


 

2020 PROXY STATEMENT  3


Table of Contents

Business Overview

Our Business Performance

In fiscal year 2020, we continued to achieve strong business results, focusing on enabling the success and earning the trust of our customers. We expanded our offerings and accelerated innovation to capture the opportunities that the era of intelligent cloud and intelligent edge is creating for our customers. We continue to improve our position as a trusted partner to our customers, accelerating their digital transformations through our key cloud technologies, productivity tools, and artificial intelligence assets.

Fiscal Year 2020 Achievements

 

$143.0 billion

  $53.0 billion   $44.3 billion   $5.76
     

Revenue, a 14% increase

  Operating income, a 23% increase   Net income, an increase of 13% GAAP and 20% non-GAAP   Diluted earnings per share, an increase of 14% GAAP and 21% non-GAAP

 

 

Commercial cloud revenue increased 36% to $51.7 billion

 

 

Office Commercial products and cloud services revenue increased 12%

 

 

Office Consumer products and cloud services revenue increased 11%

 

 

LinkedIn revenue increased 20%

 

 

Dynamics products and cloud services revenue increased 14%

 

 

Server products and cloud services revenue increased 27%

 

 

Enterprise Services revenue increased 5%

 

 

Windows Commercial products and cloud services revenue increased 18%

 

 

Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 9%

 

 

Surface revenue increased 8%

 

 

Xbox content and services revenue increased 11%

 

 

Search advertising revenue, excluding traffic acquisition costs, was relatively unchanged

Percentages are year-over-year. See Annex A for a reconciliation of financial measures presented under accounting principles generally accepted in the United States of America (“GAAP”) to non-GAAP financial measures. Key performance indicators are defined in our Form 10-K for the fiscal year ended June 30, 2020.

 

   

    Strong Long-Term Performance    

 

   
     

Total Shareholder Return*

through June 30, 2020

 

 

 

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Our total shareholder

return and total cash

returned to shareholders

for the past three years

have continued to

be strong.

  

Total Cash Returned

to Shareholders

(in billions)

 

 

 

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* Total shareholder return includes reinvestment of dividends.

 

Governance and Board Best Practices

Our mission to empower every person and every organization on the planet to achieve more is ambitious, and we cannot fulfill it with a narrow or short-term focus. Our adoption of leading governance practices fosters our sustained business success over the long term. Strong corporate governance, informed by participation from our shareholders, is essential to achieving our mission. During fiscal year 2020, independent members of our Board and members of management engaged with a cross-section of shareholders owning over 48% of our shares and provided shareholder feedback to the Board.



 

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Our Board believes that having a diverse mix of directors with complementary qualifications, expertise, and attributes is essential to meeting its oversight responsibility. Of our 12 Board nominees, 11 are independent. Having an independent Board is a core element of our governance philosophy.

 

   

    Our Director Nominees    

 

   
     
       
 

 

 

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Board Diversity

 

       

 

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7

                   
    

 

 

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Financial

 

     
 

6

                     
    

 

 

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Global Business

 

     
 

11

           
    

 

 

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Leadership

 

     
 

12

         
    

 

 

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Mergers and Acquisitions

 

     
 

12

         
    

 

 

LOGO     

 

Sales and Marketing

 

     
 

5

                       
    

 

 

LOGO     

 

Technology

 

     
 

7

                   
                                   
                                                                   

 

   

    Independent, Effective Board Oversight    

 

   
     
   

•  Independent Board Chair

 

•  11 of 12 director nominees are independent

 

•  All committee members are independent

 

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

 

•  Executive sessions provided for all quarterly Board and committee meetings

 

•  Annual Board and committee evaluations

 

•  Director orientation and continuing education programs for directors

 

•  All current Audit Committee members meet the NASDAQ listing standard of financial sophistication and three members are audit committee financial experts under the Securities and Exchange Commission (“SEC”) rules

   
 

 

   

    Shareholder Rights    

 

   
     

•  Single class of stock with equal voting rights

 

•  All directors are elected annually

 

•  Directors are elected by majority vote in uncontested elections

 

•  Confidential voting policy

 

•  15% of outstanding shares can call a special meeting

 

•  Our bylaws provide for “proxy access” by shareholders

 

See Part 1 – Governance and our Board of Directors and Part 5 – Information About the Meeting for more information.



 

2020 PROXY STATEMENT  5


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

1. Governance and our Board of Directors

 

 

Governance, Trust, and Resilience

We believe that earning the trust of our customers, partners, shareholders, and other stakeholders is the foundation of our business success and is fundamental to realizing Microsoft’s mission to empower every person and every organization on the planet to achieve more. Times of upheaval reveal the strength of that foundation, and the tumultuous events of 2020 have only underscored the importance of our approach. If we are meeting the standard to which we hold ourselves, we will—even through periods of social and economic disruption—build trust with our shareholders and other stakeholders, maintain the integrity of our operations, and help customers have the resilience to achieve their objectives.

Responding to Coronavirus

As the COVID-19 pandemic swept the globe, Microsoft responded quickly in service of our top priority: protecting the health and safety of our employees and the communities in which we operate. We’re working to support these groups through continued pay for hourly service providers, extended parental leave, cash grants to local organizations, securing needed personal protective medical equipment, and more. We sought to empower our employees with regular, clear, and transparent communication from senior leadership that offers guidance on our global policies while providing the ability to follow the guidance of local government and health authorities in the communities where our employees reside. We also sought to help our customers use technology to ensure people can stay productive and connected with new tools and product features. Finally, we’re helping the world’s leaders and researchers in the fight against COVID-19. We dedicated $20 million of our AI for Health program to supporting COVID-19 efforts. This includes teaming up with the United States (“U.S.”) Centers for Disease Control and Prevention to develop Microsoft’s Healthcare Bot, and The Bill & Melinda Gates Foundation to fuel the CoVIg-19 Plasma Bot and CoVIg-19 Plasma Alliance plasma donation recruitment website.

The Call for Racial Justice

As the U.S. and much of the world faced a wave of protests calling for racial justice, we worked to build on our past commitments and help push for greater impact by supporting inclusive economic opportunity. First, we committed to increasing our representation and culture of inclusion. We will build on our diversity and inclusion (“D&I”) momentum from the past five years by adding an additional $150 million of D&I investment, and will double the number of Black and African American people managers, senior individual contributors, and senior leaders in the U.S. by 2025. We also committed to engaging our ecosystem. We will use our balance sheet and engagement with suppliers and partners to extend the vision for societal change throughout our ecosystem, creating new opportunities for them and the communities they serve. Finally, we committed to efforts that strengthen our communities. We will use the power of data, technology, and partnership to help address racial injustice in the lives of Black and African American citizens across the U.S., including to address the safety and well-being of our own employees in the communities in which they live. Our expanded Justice Reform Initiative seeks to protect fundamental rights and create a more equitable justice system by working with diverse stakeholders to advance reforms in policing, diversion, and prosecution.

Our Board’s Engagement

Through these challenges and others, our management benefits from the thoughtful insights and oversight provided by our diverse mix of directors with complementary qualifications, expertise, and attributes. Throughout 2020, our Board of Directors and its committees maintained its regular schedule of quarterly meetings, quickly transitioning to virtual meetings using Microsoft Teams as COVID-19 emerged. The Board’s longstanding work to provide oversight, review, and counsel related to long-term strategy, risks, and opportunities provided a strong foundation for management and the Board to build upon in responding quickly and appropriately to these and other unexpected global challenges and to seize new opportunities to serve our customers and fulfill our mission.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Building Trust and Accountability

Our shareholders, employees, customers, regulators, and other stakeholders are all increasingly focused on the importance of the effective engagement and action on environmental, social, and governance (“ESG”) topics.

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

In addition, we have made a broad range of environmental and social commitments. Some of our key commitments are highlighted on page 8 and many more are disclosed at www.microsoft.com/csr. We also aim to hold ourselves accountable by publicly reporting on our policies, practices, and performance to provide our stakeholders visibility into how we are meeting our commitments and responsibilities. Our Reports Hub available at www.microsoft.com/transparency provides a consolidated, comprehensive view of our ESG reporting and data ranging from our carbon footprint to workforce demographics to political donations. We work to align our ESG reporting to global standards such as the Global Reporting Initiative Sustainability Reporting Standards and sector-based materiality maps provided by the Sustainable Accounting Standards Board. In addition, we were among the first companies to align our human rights work with the United Nations Guiding Principles on Business and Human Rights and to adopt the United Nations Guiding Principles Reporting Framework.

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

Overall, we believe that our commitment to strong corporate governance and effective board oversight plays a critical role in ensuring accountability, earning trust, and boosting our resilience in a turbulent world. Below we describe Microsoft’s corporate governance policies and practices that foster effective board oversight in service of the long-term interests of our shareholders, explain the process for selecting director candidates, and present the 2020 nominees for election to our Board.

 


 

2020 PROXY STATEMENT  7


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

   

    Management and Governance of Key Environmental and Social Topics    

 

   
     

From our CEO and Senior Leadership Team (“SLT”) and throughout our organization, people at Microsoft are working to conduct our business in principled ways that make a significant positive impact on important global issues. Microsoft’s Board of Directors provides insight, feedback, and oversight across a broad range of environmental and social matters. In particular, among the responsibilities of the Board’s Regulatory and Public Policy Committee is to provide oversight and guidance to the Board and management about the Company’s policies and programs that relate to corporate social responsibility.

 

Here is how Microsoft is managing three topics that we know are of interest to many of our shareholders and other stakeholders. Deeper information across a wide range of ESG topics is available at www.microsoft.com/csr.

 

Workplace and Culture

 

Microsoft aims to recruit, develop, and retain world-changing and diverse talent. To foster their and our joint success, we seek to create an environment where people can do their best work—a place where they can proudly be their authentic selves, and where they know their needs can be met. We’ve used the concept of a growth mindset to transform our culture. It starts with a belief that everyone can grow and develop; that potential is nurtured, not predetermined; and that anyone can change their mindset. We’re also working to transform HR using data, technology, process excellence, and investing in our people. For instance, we’ve sought to align our employee benefits to our culture, evolving them to be more holistic and inclusive. Over the past several years we’ve sought to drive inclusive opportunity by providing increased transparency on our diversity and inclusion commitments and making progress in applying and advancing D&I practices across our workplace, including a focus on allyship, behavior modeling, broadening our search for talent, and nurturing employee advocacy groups. See more at www.microsoft.com/diversity.

 

Environmental Sustainability

 

Microsoft’s strategy for a sustainable future focuses on climate, ecosystems, water, and waste. On climate, this includes a commitment to becoming carbon negative across Microsoft operations and our supply chain by 2030, shifting to 100% renewable energy by 2025, and launching a Climate Innovation Fund to invest $1 billion over the next four years in new technologies and innovative sustainability solutions. We also aim to be a leading provider of technology solutions for environmental challenges. In April 2020, we shared plans to create a “Planetary Computer,” which will aggregate environmental data from around the world and put it to work to help our partners and customers with environmental decision making in their organizational activities. We’ve also committed to advocate for public policies that support carbon reduction and removal and ecosystem protection. See more on these and our latest commitments at www.microsoft.com/environment.

 

Responsible AI

 

Microsoft is committed to ensuring our artificial intelligence (“AI”) breakthroughs are developed responsibly, earn people’s trust, and benefit society. Microsoft created our Office of Responsible AI (“ORA”) and a multidisciplinary internal AI, Ethics, and Effects in Engineering and Research Committee (“AETHER”), to establish an internal governance structure that provide principles, practices, tools, and compliance processes across the Company that help to ensure Microsoft is upholding its AI principles in its development of AI technology and products. ORA sets our rules and governance processes, working closely to enable teams across the Company, and AETHER advises our leadership on the challenges and opportunities presented by AI innovations. Together, ORA and AETHER work closely with our engineering and sales teams to help them uphold Microsoft’s AI principles in their day-to-day work. We are active on the public policy front calling for laws and regulation on AI technologies like facial recognition to ensure that the promise of AI is realized for the benefit of society at large while protecting fundamental rights. See more at https://www.microsoft.com/ai/our-approach.

 

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

Board of Directors Oversight Roles

Shareholders elect our Board to serve their long-term interests and to oversee management. Our Board and its committees work closely with management to provide oversight, review, and counsel related to long-term strategy, risks, and opportunities, and feedback from shareholders. In particular, the Board oversees business affairs and integrity, works with management to determine our mission and long-term strategy, oversees risk management, performs the annual CEO evaluation, oversees CEO succession planning, and oversees internal controls over financial reporting and external audit. The Board looks to the expertise of its committees to provide strategic oversight in their areas of focus. Examples of oversight areas are provided below and further below we describe the Board’s committee structure and each committee’s areas of focus and oversight.

Strategy

Led by the CEO, the SLT develops and executes our business strategy. It manages our operations and works to model our desired culture, create innovative products, establish accountability, and control risk. The SLT also aligns our structure, operations, people, policies, and compliance efforts to our mission and strategy.

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

Risk

Effective risk management is critical to Microsoft’s ability to achieve its mission. The Board oversees management in exercising its responsibility managing risk. With the Audit Committee, the Board assesses whether management has an appropriate framework to manage risks and whether that framework is operating effectively. On a regular basis, the Board and its committees engage with management on risk as part of broad strategic and operational discussions which encompass interrelated risks, as well as on a risk-by-risk basis. The Board executes its oversight responsibility directly and through its committees, who regularly report back to the Board. For information on specific areas of risk oversight, each committee has a charter describing its specific responsibilities which can be found on our website at https://aka.ms/boardcommittees. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees. For example, the Board maintains direct oversight over cybersecurity risk. The Board receives and provides feedback on regular updates from management regarding cybersecurity governance processes, the status of projects to strengthen internal cybersecurity, security features of the products and services we provide our customers, and the results of security breach simulations. The Board also discusses recent incidents throughout the industry and the emerging threat landscape, in part identified through Microsoft’s intelligent security graph. (For more information, see www.microsoft.com/security/intelligence-security-api). We believe that the Board’s leadership structure, including its independent chair, supermajority of independent directors, and allocation of oversight responsibilities to appropriate committees, provides effective board-level risk oversight.

Culture, Workplace, and Succession Planning

Our culture isn’t what we talk or write about; it’s what’s we live every day. Our SLT holds itself accountable to modeling the culture we strive for. We focus on creating a respectful, rewarding, diverse, and inclusive work environment that allows our employees to build meaningful careers. Key to this environment is cultivating a growth mindset, where our workforce is focused on learning, listening, and growing. We have established a set of five “People Priorities” that ground our Human Resource strategy:

 

 

Talent that can change the world

 

 

An evolving culture embracing a growth mindset

 

 

An exceptional place to work

 

 

Transformational leadership

 

 

Empowering at scale

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Each SLT member serves as a “sponsor” for one or more of the priorities and all are accountable to help achieve them. We consider employee input from our annual anonymous poll and other feedback channels in designing talent programs, rewards, and benefits, and building the overall employee experience.

The Board and the Compensation Committee engage with the SLT and Human Resources executives across a broad range of human capital management topics including culture, succession planning and development, compensation, benefits, employee recruiting and retention, and diversity and inclusion. Additionally, each year the Compensation and Audit Committees evaluate management’s annual assessment of risk related to our compensation policies and practices. The Compensation Committee also oversees our sales incentive programs through engagement with management’s Sales Incentive Compensation Governance Committee.

A primary responsibility of the Board is planning for CEO succession and overseeing identification and development of other members of the SLT. The Board and the Compensation Committee work with the CEO and our head of Human Resources to plan for succession. For the CEO, the succession plan covers identification of internal and external candidates, and development plans for internal candidates. The Board annually reviews the CEO succession plan. The criteria used to assess potential CEO candidates are formulated based on the Company’s business strategies, and include strategic vision, leadership, and operational execution. The Board is committed to actively seeking highly qualified women and individuals from minority groups to include in the pool of potential CEO candidates. The Board maintains an emergency succession contingency plan that is reviewed on an annual basis by the Board and Governance and Nominating Committee. The plan identifies roles and responsibilities of individuals who would act if an unforeseen event prevented the CEO from continuing to serve. The Compensation Committee reviews with the CEO and reports to the Board on development and succession plans for the SLT. The Board may review development and succession planning more frequently as it deems necessary or desirable.

 

 

Our Governance Structure

Framework

We have developed a corporate governance framework designed to ensure our Board has the authority and practices in place to review and evaluate our business operations and to make decisions independent of management. Our goal is to align the interests of directors, management, and shareholders, and comply with or exceed the requirements of the NASDAQ Stock Market, LLC (“Nasdaq”) and applicable laws and regulations. This framework establishes the practices our Board follows with respect to, among other things, Board composition and member selection, Board meetings and involvement of senior management, director compensation, CEO performance evaluation, management succession planning, and Board committees. The Board is committed to seeking opportunities for improvements on an ongoing basis. Each summer, the Board updates our corporate governance framework based on shareholder feedback, results from the annual shareholders meeting, the Board and committees’ self-assessments, governance best practices, and regulatory developments.

 

   

    Our Corporate Governance Documents    

 

   
     

• Articles of Incorporation

• Bylaws

• Corporate Governance Guidelines

• Director Independence Guidelines

• Microsoft Finance Code of Professional Conduct

• Microsoft Standards of Business Conduct

• Audit Committee Charter and Responsibilities Calendar

 

  

• Compensation Committee Charter

• Governance and Nominating Committee Charter

• Regulatory and Public Policy Committee Charter

• Executive Stock Ownership Policy

• Executive Compensation Recovery Policy

• Compensation Consultant Independence Standards

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

Shareholder Rights

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

 

 

Single class of shares with each share entitled to one vote

 

 

Annual election of all directors (unclassified board)

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

Majority voting standard for directors in uncontested elections

 

 

Confidential voting policy

 

 

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

 

 

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

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

Public company board service limit of no more than three other public company boards for directors. Directors who are current CEOs should not serve on more than one other public company board

 

Shareholder Engagement

Effective corporate governance includes regular, constructive conversations with our shareholders to proactively seek shareholder insights and to answer shareholder inquiries. We maintain an active dialogue with shareholders to ensure we thoughtfully consider a diversity of perspectives on issues including strategy, business performance, risk, culture and workplace topics, compensation practices, and a broad range of ESG issues. As noted above, the Board updates our corporate governance framework each summer based on a number of inputs, including shareholder feedback.

Our Office of the Corporate Secretary coordinates engagement with Investor Relations and provides a summary of all relevant feedback to our Board. In fiscal year 2020, our Board Chair and members of management engaged with a cross-section of shareholders owning 48% of Microsoft shares. In addition, throughout the year our Investor Relations group engages with our shareholders, frequently along with Mr. Nadella, our CEO, or Ms. Hood, our CFO. Building on our fiscal year 2020 outreach, we engaged investors representing 45% of outstanding shares in the first quarter of fiscal year 2021. After assuming the Chair of the Compensation Committee, Ms. Peterson proactively sought shareholder feedback and together with our Independent Board Chair held conversations in the summer of 2020 with investors representing over 22% of our shares outstanding. Over the summer, management engaged additional investors representing another 23% of our outstanding shares to discuss executive compensation and other ESG topics.

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

We are proud to have helped pioneer a director video series that gives shareholders and other stakeholders insight into the thinking of our Board members. The videos provide an opportunity for our directors to discuss how they approach their role and responsibilities and to provide a behind-the-scenes look into the boardroom. The series can be viewed on our website at https://aka.ms/DirectorVideoSeries. This year we supplemented the series with videos of leaders from across Microsoft discussing our commitments to address key environmental and social challenges.

 

Annual Board and Committee Evaluation Process

The Board is committed to a rigorous self-evaluation process. The Governance and Nominating Committee annually evaluates the performance of the Board. In fiscal year 2020, the evaluation included utilizing a third-party facilitator to seek feedback from each director, and the results were 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.

 


 

2020 PROXY STATEMENT  11


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Our evaluation process is designed to elicit feedback on the processes, structure, composition, and effectiveness of the Board. The evaluation results have led to changes to facilitate increased Board effectiveness, including the appropriate distribution of oversight responsibilities across the Board and its committees, the structure of executive sessions, enhancements to director onboarding and continuing education programs, and consideration of the quantity and depth of information included in meeting materials.

In addition, each committee annually evaluates its performance and reports the results to the Board. In fiscal year 2020, a third-party facilitator conducted the evaluation of each committee, which included feedback from directors, as well as key members of management and consultants who regularly attend the meetings. Each committee’s evaluation included an assessment of the committee’s compliance with the principles in the Corporate Governance Guidelines and its charter, and identified areas in which the committee could enhance its performance. Results requiring additional review or consideration are discussed at subsequent Board and committee meetings.

Director Attendance

Each quarter, our Board holds two-day meetings. Committee meetings occur the first day before the Board meeting. Once a year, committee and Board meetings occur on the same day so that the evening and following day can be devoted to the Board’s annual strategy retreat, which includes presentations and discussions with our SLT and other senior management about our long-term strategy. In addition to the quarterly meetings, typically there are other regularly scheduled Board and committee meetings and several special meetings each year. At each quarterly Board meeting, time is set aside for the independent directors to meet without management present. Our Board met seven times during fiscal year 2020.

Each director nominee attended at least 75% of the aggregate of all fiscal year 2020 meetings of the Board and each committee on which he or she served. In fiscal year 2020, the Board and committees of the Board held a total of 31 meetings. The director nominees attended at least 95% of the combined total meetings of the full Board and the committees on which they were members in fiscal year 2020.

Directors are expected to attend the annual shareholders meeting, if practicable. All directors attended the 2019 Annual Meeting.

Director Orientation and Continuing Education

Our orientation programs are designed to familiarize new directors with our businesses, strategies, and policies and assist new directors in developing Company and industry knowledge to optimize their service on the Board.

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

Director Stock Ownership Policy

To align the interests of our directors and shareholders, our directors are required to own Microsoft shares equal in value to at least three times the base annual retainer (cash and stock) payable to a director. Each director must retain 50% of all net shares (post-tax) from the retainer until reaching the minimum share ownership requirement. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts toward the minimum ownership requirement. Each of our directors complied with our stock ownership policy in fiscal year 2020.

Derivatives Trading, Hedging, and Pledging

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

 


 

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GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Board Independence

The Board’s independence enables it to be objective and critical in carrying out its oversight responsibilities. The Corporate Governance Guidelines provide that a substantial majority of our directors will be independent. The independent members of the Board annually appoint an independent Board Chair to facilitate the Board’s oversight of management, promote communication between management and our Board, engage with shareholders, and lead consideration of key governance matters.

 

   

    Key Elements of Board Independence at Microsoft    

 

   
     

•  11 of 12 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, all director nominees are independent

 

•  Board tenure – We are committed to board refreshment. To strike a balance between retaining directors with deep knowledge of the Company and adding directors with a fresh perspective, the Board will seek to maintain an average tenure of 10 years or less for its independent directors as a group. The current average tenure for our independent directors is 4.6 years

 

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

 

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

 

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

 

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

 

• Calling meetings of the Board and independent directors

 

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

 

• Chairing executive sessions and coordinating activities of the independent directors

 

• Leading the Board’s annual CEO performance evaluation

 

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

 

Board Committees

To support effective corporate governance, our Board delegates certain responsibilities to its committees, who report on their activities to the Board. These committees have the authority to engage legal counsel or other advisors or consultants as they deem appropriate to carry out their responsibilities. Our Board has an Audit Committee, Compensation Committee, Governance and Nominating Committee, and Regulatory and Public Policy Committee. In addition, in fiscal year 2020 our Regulatory and Public Policy Committee held joint meetings with both the Audit Committee and the Compensation Committee on areas of complementary responsibility.

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

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Membership

 

Director

   Audit        Compensation    

    Governance and

Nominating

 

 

   
     Regulatory and
Public Policy

 

 

Reid G. Hoffman

                         

 

Hugh F. Johnston

  

 

LOGO   LOGO

                    

 

Teri L. List-Stoll

   LOGO          LOGO          

 

Satya Nadella

                         

 

Sandra E. Peterson

        LOGO     LOGO          

 

Penny S. Pritzker

                      LOGO  

 

Charles W. Scharf

        LOGO     LOGO          

 

Arne M. Sorenson

   LOGO                     

 

John W. Stanton

   LOGO                  LOGO  

 

John W. Thompson

              LOGO       LOGO  

 

Emma N. Walmsley

        LOGO             LOGO  

 

Padmasree Warrior

        LOGO                

 

Number of meetings in fiscal year 2020

  

11

  

5

    5       3  
   LOGO   Chair             LOGO   Member             LOGO   Financial Expert 

 

 

   

    Audit    

 

   
     

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

 

•  Oversee internal auditing processes

 

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

 

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

 

•  Review with management the Company’s business continuity and disaster preparedness planning

 

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

 

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

 

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

 

 


 

14    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

        Compensation    

 

   
     

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•  Oversee and advise the Board and management about Company policies, programs, and initiatives for diversity and inclusion and human capital management

 

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

 

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

 

Independent compensation consultant – The Compensation Committee retained an independent compensation consultant throughout fiscal year 2020. For the first part of the year, Semler Brossy Consulting Group, LLC served in this role, and effective as of March 9, 2020, they were succeeded by Pay Governance LLC. The consultant advises the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and executive officer compensation decisions. The consultant also evaluates compensation for non-employee directors, the next levels of senior management, and equity compensation programs generally. The consultant discusses recommendations to the Board on CEO compensation with the Committee, and is directly accountable to the Committee. To maintain the independence of the consultant’s advice, neither firm provides or provided services to Microsoft other than those described above. The Committee has adopted Compensation Consultant Independence Standards which can be viewed on our website at https://aka.ms/policiesandguidelines. These standards require that the Committee annually assess the independence of its compensation consultant. A consultant satisfying the following requirements will be considered independent. The consultant (including each individual employee of the consultant providing services):

 

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

 

•  Is independent of the Company

 

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

 

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

 

In assessing the consultant’s independence, the Compensation Committee considers the nature and amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the fees paid for those services in relation to the firm’s total revenue. 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 each of Semler Brossy and Pay Governance have been independent during its service for the Committee.

 

 


 

2020 PROXY STATEMENT  15


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

    Governance and Nominating    

 

 
     

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

 

• Identify, recruit, and recommend candidates for the Board

 

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

 

• Annually evaluate the performance and effectiveness of the Board

 

• Annually assess the independence of each director

 

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

 

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

 

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

 

 

      Regulatory and Public Policy    

 

 
     

• Assist the Board in overseeing the Company’s key non-financial regulatory risks that may have a material impact on the Company and its ability to sustain trust with customers, employees, and the public

 

• Oversee management policies and programs relating to legal, regulatory, compliance, and corporate responsibility matters concerning competition and antitrust, privacy, trade, digital safety, artificial intelligence, and environmental sustainability, as well as significant issues relating to accessibility, human rights, and responsible sourcing

 

• Review our government relations activity and political activities and expenditures

 

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

 

 


 

16    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

 

Director Selection and Qualifications

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

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

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

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

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

Shareholders previously elected all Board nominees.

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

 

 

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

 

 

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

 

 

Assessing the Committee’s own performance

Shareholder Recommendations and Nominations of Director Candidates

Recommendations

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

Nominations

Our Bylaws provide for proxy access shareholder nominations of director candidates by eligible shareholders. A shareholder who wishes to formally nominate a candidate, whether for inclusion in the Company’s proxy statement or not, must follow the procedures described in Article 1 of our Bylaws. Appropriately nominated proxy access candidates will be included in the Company’s proxy statement and ballot.

 


 

2020 PROXY STATEMENT  17


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

 

Board Composition

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

 

   

    Director Nominee Qualifications, Expertise, and Attributes    

 

   
     
       
   

    

 

       

 

 

LOGO

 

 

 

LOGO

 

 

 

 

LOGO

 

 

 

LOGO

 

 

 

LOGO     

 

Board Diversity

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

 

     
 

7

                   
    

 

 

LOGO     

 

Financial

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

 

     
 

6

                     
    

 

 

LOGO     

 

 

Global Business

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

 

     
 

11

           
    

 

 

LOGO     

 

 

Leadership

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

 

     
 

12

         
    

 

 

LOGO     

 

 

Mergers and Acquisitions

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

 

     
 

12

         
    

 

 

LOGO     

 

 

Sales and Marketing

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

 

     
 

5

                       
    

 

 

LOGO     

 

 

Technology

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

 

     
 

7

                   
                                   
                                   
                                   
                                   
                                                                   

 


 

18    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

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

 

   

    Director Skill Matrix    

 

   
     

 

LOGO

 

 


 

2020 PROXY STATEMENT  19


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

 

Our Director Nominees

Following are biographies for the 12 directors nominated by the Board for election during the 2020 Annual Meeting.

 

LOGO     

Reid G. Hoffman 

 
   
    

 

Age: 53 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO       

          
   

Experience:

Greylock Partners (2009-present)

(venture capital firm)

   Partner (2009-present)

Reinvent Capital (2019-present)

   Partner (2019-present)

LinkedIn Corporation (2003-2016)

    Co-founder and Chairman (2003-2016)

   Executive Chairman (2009)

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

   President, Products (2007-2008)

PayPal Inc. (2000-2002)

   Executive Vice President (2000-2002)

 

  

Microsoft Committees:

•   None

 

Other Public Company Directorships:

   Reinvent Technology Partners

 

Former Public Company Directorships
Held in the Past Five Years:

   LinkedIn Corporation

 

 

 

LOGO   

Hugh F. Johnston 

 
   
  

 

Age: 59 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

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

(food and beverage company)

   Vice Chairman (2015-present)

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

   Executive Vice President, Global Operations (2009-2010)

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

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

Merck & Company, Inc. (1999-2002)

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

 

  

 

Microsoft Committees:

   Audit (Chair)

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
held in the Past Five Years:

   Twitter Inc.

 


 

LOGO

 


 

20    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

LOGO   

Teri L. List-Stoll 

 
   
  

 

Age: 57 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

The Gap, Inc. (2016-2020)

(clothing and accessories retailer)

   Executive Vice President and Chief Financial Officer (2016-2020)

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

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

Kraft Foods Group, Inc. (2013-2015)

   Senior Advisor (2015)

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

   Senior Vice President (2013)

Procter & Gamble Co. (1994-2013)

   Senior Vice President and Treasurer (2009-2013)

   Various positions of increasing authority (1994-2009)

 

  

Microsoft Committees:

   Audit

   Governance and Nominating

 

Other Public Company Directorships:

   Danaher Corporation

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Former Trustee, Financial Accounting Foundation

   Former Practice Fellow, Financial Accounting Standards Board

LOGO   

Satya Nadella 

 
   
  

 

Age: 53 | Director Since: 2014 | Birthplace: India

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Microsoft Corporation (1992-present)

   Chief Executive Officer and Director (2014-present)

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

   President, Server and Tools (2011-2013)

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

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

   Various positions of increasing authority (1992-2008)

  

 

Microsoft Committees:

•   None

 

Other Public Company Directorships:

   Starbucks Corporation

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

 


 

 


 

2020 PROXY STATEMENT  21


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

LOGO   

Sandra E. Peterson 

 
   
  

 

Age: 61 | Director Since: 2015 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

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

   Operating Partner (2019-present)

Johnson & Johnson (2012-2018)

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

Bayer CropScience AG (2010-2012)

   Chairman of the Board of Management (2010-2012)

   Member of Board of Management (2010)

Bayer HealthCare LLC (2005-2010)

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

   President, Diabetes Care Division (2005-2009)

Medco Health Solutions, Inc. (1999-2004)

   Group President of Government (2003-2004)

   Senior Vice President, Health Businesses (2001-2003)

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

 

  

Microsoft Committees:

   Compensation (Chair)

   Governance and Nominating

 

Other Public Company Directorships:

   Covetrus, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   Dun & Bradstreet Corporation

LOGO   

Penny S. Pritzker 

 
   
  

 

Age: 61 | Director Since: 2017 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

United States Secretary of Commerce (2013-2017)

PSP Partners, LLC (present)

(private investment firm)

   Founder and Chairman (present)

Pritzker Realty Group (present)

    Co-founder and Chairman (present)

Inspired Capital Partners (present)

    Co-founder and Chairman (present)

Artemis Real Estate Partners (2009-2013)

    Co-founder and Chairman (2009-2013)

The Parking Spot (1998-2011)

   Co-founder and Chairman (1998-2011)

Vi Senior Living (1987-2011)

   Founder and Chairman (1987-2011)

 

  

Microsoft Committees:

   Regulatory and Public Policy (Chair)

 

Other Public Company Directorships:

   None

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Co-founder, Pritzker Traubert Foundation

 


 

LOGO

 


 

22    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

LOGO   

Charles W. Scharf 

 
   
  

 

Age: 55 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Wells Fargo & Company (2019-present)

(banking and financial services company)

   Chief Executive Officer and President (2019-present)

The Bank of New York Mellon Corporation (2017-2019)

   Chairman and Chief Executive Officer (2018-2019)

   Chief Executive Officer and Director (2017)

Visa Inc. (2012-2016)

   Chief Executive Officer and Director (2012-2016)

JPMorgan Chase & Co. (2004-2012)

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

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

Bank One Corporation (2000-2004)

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

   Chief Financial Officer (2000-2002)

Citigroup, Inc. (1999-2000)

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

 

  

Microsoft Committees:

   Compensation

   Governance and Nominating

 

Other Public Company Directorships:

•   Wells Fargo & Company

 

Former Public Company Directorships
Held in the Past Five Years:

   The Bank of New York Mellon Corporation

   Visa Inc.

LOGO   

Arne M. Sorenson 

 
   
  

 

Age: 62 | Director Since: 2017 | Birthplace: Japan | Independent

 

LOGO        LOGO        LOGO        LOGO

        
   

Experience:

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

   President and Chief Executive Officer (2012-present)

   President and Chief Operating Officer (2009-2012)

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

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

   Senior Vice President, Business Development (1996-1998)

 

  

Microsoft Committees:

   Audit

 

Other Public Company Directorships:

   Marriott International, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

 


 

 


 

2020 PROXY STATEMENT  23


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

LOGO   

John W. Stanton 

 
   
  

 

Age: 65 | Director Since: 2014 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Trilogy Partnerships (2005-present)

(investment company)

   Founder and Chairman (2005-present)

Clearwire Corp. (2008-2013)

   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:

   Audit

   Regulatory and Public Policy

 

Other Public Company Directorships:

   Costco Wholesale Corporation

   Trilogy International Partners, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   Columbia Sportswear Company

 

Other Positions:

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

 

 

LOGO   

John W. Thompson 

 
   
  

 

Age: 71 | Director Since: 2012 | Birthplace: United States | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

Microsoft Corporation (2014-present)

   Independent Board Chair

Virtual Instruments Corporation (2010-2016)

   Chief Executive Officer and Director (2010-2016)

Symantec Corp. (1999-2011)

   Chairman of the Board (1999-2011)

   Chairman and Chief Executive Officer (1999-2009)

IBM Corporation (1971-1999)

   General Manager, IBM Americas (1996-1999)

   Various positions of increasing authority (1971-1996)

  

Microsoft Committees:

   Governance and Nominating (Chair)

   Regulatory and Public Policy

 

Other Public Company Directorships:

   Illumina, Inc.

 

Former Public Company Directorships
Held in the Past Five Years:

   None

 

Other Positions:

   Partner, Lightspeed Venture Partners

 

 


 

 

LOGO

 


 

24    LOGO   


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

LOGO   

Emma N. Walmsley 

 
   
  

 

Age: 51 | Director Since: 2019 | Birthplace: United Kingdom | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

GlaxoSmithKline plc (2010-present)
(healthcare company)

•  Chief Executive Officer (2017-present)

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

•  President, Consumer Healthcare (2012-2015)

•  President, Consumer Healthcare Europe (2010-2012)

L’Oreal, S.A. (1994-2010)

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

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

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

•  Various positions of increasing authority (1994-1999)

 

  

Microsoft Committees:

   Compensation

   Regulatory and Public Policy

 

Other Public Company Directorships:

   GlaxoSmithKline plc

 

Former Public Company Directorships
Held in the Past Five Years:

   Diageo plc

 

LOGO   

Padmasree Warrior 

 
   
  

 

Age: 59 | Director Since: 2015 | Birthplace: India | Independent

 

LOGO        LOGO        LOGO        LOGO        LOGO

        
   

Experience:

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

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

NIO Inc. (2015-2018)

•  Chief Development Officer (2015-2018)

•  Board member (2015-2018)

NIO USA, Inc. (2015-2018)

•  Chief Executive Officer and Director (2015-2018)

Cisco Systems, Inc. (2008-2015)

•  Strategic Advisor (2015)

•  Chief Technology and Strategy Officer (2012-2015)

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

•  Chief Technology Officer (2008-2010)

Motorola, Inc. (1999-2007)

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

 

  

Microsoft Committees:

   Compensation

 

Other Public Company Directorships:

   Spotify Technology S.A.

 

Former Public Company Directorships
Held in the Past Five Years:

   Box, Inc.

   The Gap, Inc.

 


 

 


 

2020 PROXY STATEMENT  25


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

How to Communicate with our Board

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

 

 

 

askboard@microsoft.com

   

LOGO

 

    MSC 123/9999

    Office of the Corporate Secretary

    Microsoft Corporation

    One Microsoft Way

    Redmond, WA 98052-6399

  

    

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

Director Independence Guidelines

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

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

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

Based on the review and recommendation by the Governance and Nominating Committee, the Board analyzed the independence of each director and nominee. The Board determined that Mses. List-Stoll, Peterson, Pritzker, Walmsley, and Warrior, and Messrs. Hoffman, Johnston, Scharf, Sorenson, Stanton, and Thompson (as well as Charles H. Noski and Helmut Panke, whose Board service ended on December 4, 2019) 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. In making this determination, the Committee and Board considered ordinary course transactions between Microsoft and certain related entities, for instance the purchase of software licenses by companies of which a director is an executive officer, and purchases by Microsoft of goods and services from such companies. In reaching that conclusion with respect to Ms. Pritzker, the Committee and Board considered transactions between LinkedIn, a subsidiary of Microsoft, and 3Q Digital, Inc., a digital marketing company (“3Q”), which accounted for more than 5% of 3Q’s annual revenue for its last completed fiscal year. 3Q has provided digital marketing services for LinkedIn since 2015. In May 2019, trusts for the benefit of Ms. Pritzker and her family acquired an indirect majority interest in 3Q. In making its determination regarding Ms. Pritzker’s independence, the Committee and Board noted that Ms. Pritzker is not a director or officer of, and holds no direct equity ownership interest in, 3Q or any of its parent organizations. The Committee and Board further noted that Ms. Pritzker has recused herself from participation in any decisions related to 3Q or the Trusts’ investment therein and does not otherwise have the ability to control the Trusts’ investment or other decisions regarding 3Q. Ms. Pritzker was not involved in the negotiation of the commercial agreements between 3Q and LinkedIn.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

Certain Relationships and Related Transactions

We are a global company with extensive operations in the U.S. 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, business arrangements or relationships with businesses and other organizations in which one of our directors, executive officers, nominees for director, or an owner of 5% or more of our stock (“5% shareholders”) or their immediate families, may also be a director, executive officer, or investor, or have some other direct or indirect material interest (“related entities”). We will refer to these transactions with related entities as related-party transactions where the amount involved exceeds $120,000 and a director, executive officer, nominee for director or 5% shareholders, or immediate family member has a direct or indirect material interest.

Related-party transactions have the potential to create actual or perceived conflicts of interest between Microsoft and its directors, executive officers, nominees for director or 5% shareholders, 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 be as favorable to Microsoft as would be available from non-related entities in comparable transactions. The Audit Committee also requires that the transaction meet the same Microsoft standards that apply to comparable transactions with unaffiliated entities.

During fiscal year 2020, there were ordinary course transactions between Microsoft and certain related entities, for instance the purchase of software licenses by companies of which a director is an executive officer and purchases by Microsoft of goods and services from such companies. None of these transactions constituted a related-party transaction that required approval by the Audit Committee.

 

 

Director Compensation

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

 

Fiscal Year 2020 Compensation Structure for Directors

 

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

        

Annual Base Retainer (TOTAL)

  

 

$325,000

 

Cash

  

 

$125,000

 

Stock Award

  

 

$200,000

 

Annual Committee Chair Retainer

  

 

$15,000

 

Annual Audit Committee Chair Retainer

  

 

$45,000

 

Annual Audit Committee Non-Chair Member Retainer

  

 

$15,000

 

Independent Board Chair Retainer (Mr. Thompson)

        

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

  

 

$485,000

 

Cash

  

 

$125,000

 

Stock Award

  

 

$360,000

 

 


 

2020 PROXY STATEMENT  27


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

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

Director Compensation

This table describes the cash and stock award portions of the annual retainer paid to each non-employee director who served in fiscal year 2020. Mr. Nadella received no compensation as a director. He is excluded from the table because we fully describe his compensation in Part 2 – Named Executive Officer Compensation.

 

Name

      

Fees Earned or
Paid in Cash¹

($)


 

 

      
Stock Awards²
($)

 
      

All Other
Compensation3

($)


 

 

      
Total
($)

 

William H. Gates III4

    

 

0

 

    

 

0

 

    

 

0

 

    

 

0

 

Reid G. Hoffman5

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

Hugh F. Johnston

    

 

155,232

 

    

 

200,000

 

    

 

0

 

    

 

355,232

 

Teri L. List-Stoll6

    

 

140,000

 

    

 

200,000

 

    

 

15,000

 

    

 

355,000

 

Charles H. Noski7

    

 

84,652

 

    

 

100,000

 

    

 

0

 

    

 

184,652

 

Helmut Panke8

    

 

77,384

 

    

 

100,000

 

    

 

0

 

    

 

177,384

 

Sandra E. Peterson9

    

 

132,616

 

    

 

200,000

 

    

 

0

 

    

 

332,616

 

Penny S. Pritzker10

    

 

132,616

 

    

 

200,000

 

    

 

15,000

 

    

 

347,616

 

Charles W. Scharf

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

Arne M. Sorenson

    

 

140,000

 

    

 

200,000

 

    

 

15,000

 

    

 

355,000

 

John W. Stanton

    

 

139,884

 

    

 

200,000

 

    

 

15,000

 

    

 

354,884

 

John W. Thompson11

    

 

125,000

 

    

 

360,000

 

    

 

0

 

    

 

485,000

 

Emma N. Walmsley12

    

 

62,500

 

    

 

100,000

 

    

 

0

 

    

 

162,500

 

Padmasree Warrior13

    

 

125,000

 

    

 

200,000

 

    

 

0

 

    

 

325,000

 

 

 

(1)

The value of fractional shares under stock awards that are paid in cash are reported in the Stock Awards column.

 

(2)

The aggregate award value in the “Stock Awards” column for each director represents four quarterly awards, each with a grant date fair value under FASB ASC Topic 718 of $50,000, with exceptions as follows: Mr. Thompson received four quarterly awards, each with a grant date fair value under FASB ASC Topic 718 of $90,000; Mr. Noski & Dr. Panke both ended their Board service in December 2019, so did not receive a stock award in the 3rd or 4th quarter; and Ms. Walmsley joined the Board in December 2019, so did not receive a stock award in the 1st or 2nd quarter.

 

(3)

Amounts in this column represent matching charitable contributions under our corporate giving program in fiscal year 2020, which matches director gifts up to $15,000 per calendar year.

 

(4)

Mr. Gates waived his cash and stock compensation. Mr. Gates ended his board service effective March 13, 2020.

 

(5)

Mr. Hoffman elected to defer his cash and stock compensation. The compensation deferred converted into 2,064 shares of our common stock.

 

(6)

Ms. List-Stoll elected to defer her cash and stock compensation. The compensation deferred converted into 2,159 shares of our common stock.

 

(7)

Mr. Noski elected to defer his stock compensation. The compensation deferred converted into 702 shares of our common stock. Mr. Noski ended his Board service effective December 4, 2019.

 

(8)

Dr. Panke ended his Board service effective December 4, 2019.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF

DIRECTORS

 

      2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

  3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

       

 

(9)

Ms. Peterson elected to defer her cash and stock compensation. The compensation deferred converted into 2,106 shares of our common stock.

 

(10)

Ms. Pritzker elected to defer her cash and stock compensation. The compensation deferred converted into 2,106 shares of our common stock.

 

(11)

Mr. Thompson elected to defer his stock compensation. The compensation deferred converted into 2,285 shares of our common stock.

 

(12)

Ms. Walmsley was elected to the board effective December 4, 2019.

 

(13)

Ms. Warrior elected to defer a portion of her cash compensation. The compensation deferred converted into 395 shares of our common stock.

Independent Board Chair Compensation

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

 


 

2020 PROXY STATEMENT  29


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

2. Named Executive Officer Compensation

 

 

A Letter from the Compensation Committee

Dear Shareholder,

Our fiscal year 2020 marked another year of historic financial performance for our Company despite the unprecedented disruption of COVID-19. Our diverse portfolio, durable business models, and integrated, modern technology stack, powered by cloud and AI and underpinned by a clear focus on security and compliance, uniquely positioned us for continued progress during the past year. In this dynamic environment, we remain committed to meeting customer needs and helping organizations digitally transform, while ensuring our employees are well positioned to work effectively in an evolving landscape.

Our executive compensation program is designed to achieve strong alignment between our long-term strategic goals and our shareholders’ interests, while providing a competitive total pay opportunity to attract and retain the key executives who drive our business. We are committed to continually reviewing our compensation program to ensure it is grounded in our pay-for-performance philosophy.

Our Company continued with its active shareholder engagement program over the course of fiscal year 2020 and into early fiscal 2021. This involved discussions with investors representing nearly half of our shares outstanding. Throughout these conversations, many of which included participation from our Compensation Committee Chair and Independent Board Chair, we heard our shareholders’ perspectives on our compensation structure and disclosure. We carefully considered the feedback provided by our shareholders as our Committee made changes to our 2021 compensation program.

We made a number of enhancements to our 2021 compensation program to further increase pay-for-performance alignment and respond directly to shareholder feedback. Our changes included the following:

 

 

Increased the weighting of the financial metrics portion of the CEO’s annual cash incentive from 50% to 70%

 

 

Increased the performance-based portion of our CEO’s equity awards from 50% to 70%

 

 

Revised the TSR modifier to our Performance Stock Awards (“PSAs”) to provide for a reduction in payout for all PSA recipients, if relative TSR falls below the 40th percentile of the S&P 500

 

 

Increased the disclosure of the goal-setting process and results under our PSAs

Our Committee believes that these enhancements build on our efforts to thoughtfully align the interests of our shareholders and incentivize growth in the long-term. We appreciate your support and welcome your feedback on our compensation program reflected in the following pages and look forward to continued dialogue in the future.

Sincerely,

The Compensation Committee

Sandra E. Peterson (Chair)

Charles W. Scharf

Emma N. Walmsley

Padmasree Warrior

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

 

Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides information about our fiscal year 2020 compensation program for our fiscal year 2020 named executive officers (“Named Executives”). The content of this Compensation Discussion and Analysis is organized into six sections:

 

   

    Table of Contents    

 

    
      
   

Section 1 – Performance Update

  p. 31
   

Section 2 – Executive Compensation Program Enhancements

  p. 34
   

Section 3 – Pay Setting

  p. 36
   

Section 4 – Fiscal Year 2020 Compensation Program Design

  p. 40
   

Section 5 – Fiscal Year 2020 Compensation Decisions

  p. 43
   

Section 6 – Other Compensation Policies and Information

  p. 49        

 

Microsoft’s executive compensation program is thoughtfully designed by our Compensation Committee and Board of Directors to closely track Microsoft’s long-term strategy, and over the years we have transformed our executive pay program while maintaining an overarching compensation philosophy aimed at achieving strong alignment between our long-term strategic goals and our shareholders’ interests.

The Company’s current executive compensation program has been structured to align with the business strategy that has been defined by the Board and Mr. Nadella, and each year the Compensation Committee reviews the existing incentive structure, taking into consideration investor feedback, business performance, and our strategic roadmap, in considering the efficacy of further enhancements.

 

 

Section 1 – Performance Update

Navigating Disruption

Fiscal year 2020 began with the opportunity to build on the momentum of our record-setting 2019 performance. It ended in the turmoil of a global pandemic and economic crisis, and widespread civil unrest in the United States (“U.S.”). Despite these unexpected and unprecedented events, Mr. Nadella and Microsoft’s executive team led the Company to another year of historic financial performance, while successfully adapting to radically changing circumstances and demonstrating the transformation and resilience that we aspire to enable in our customers and ecosystem.

Responding to the pandemic involved both maintaining the reliability of our own operations and accelerating our customers’ digital transformations. We took action early to enable remote work and adopt other measures to protect the health and well-being of our workforce and ensure the continuity of our operations. We built on our capabilities with our own productivity and business intelligence tools and devoted significant resources to ensure our employees and key customers such as government agencies, schools, medical facilities, and other frontline responders had virtual collaboration and other digital tools, and associated support, to optimize their effectiveness. An example of the impact we achieved is that in a single day in April, we enabled more than 200 million Microsoft Teams meeting participants generating more than 4.1 billion meeting minutes. We focused on our cloud operations to ensure their security and availability. We worked with customers and partners as they adapted to remote work and other business requirements that changed at an unprecedented pace. These efforts yielded years of transformative progress in months of time.

As Mr. Nadella has stated, the disruptions of 2020 created a collective responsibility and opportunity to define what comes next: what to rebuild, what to reimagine, and what to leave behind. Each industry shift is an opportunity to conceive new products, new technologies, and new ideas that can further transform the industry and our business. It is not a coincidence that Microsoft is uniquely positioned to adapt and help its customers answer these questions and thrive in this new environment. Whether it’s

 


 

2020 PROXY STATEMENT  31


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

improving remote work and learning scenarios; enabling deeper capabilities to harness data through the cloud, artificial intelligence, and the internet of things; democratizing data transparency and the ability to enhance business processes; or ensuring security and privacy of proprietary data, the Company has been building these capabilities intentionally even before their need became so compelling this year. Microsoft’s performance in 2020 highlights the critical value of the Company’s established long-term strategic direction allowing the Company to continue forward on its mission “to empower every person and every organization on the planet to achieve more.”

Achieving Strong Financial Results

Through all these changes, adaptations, and initiatives, Microsoft retained its focus on business execution. We achieved:

 

$143.0 billion

  $53.0 billion   $44.3 billion   $5.76
     

Revenue, a 14% increase

  Operating income, a 23% increase   Net income, an increase of 13% GAAP and 20% non-GAAP   Diluted earnings per share, an increase of 14% GAAP and 21% non-GAAP

Other highlights from fiscal year 2020 included:

 

 

Commercial cloud revenue increased 36% to $51.7 billion

 

 

Office Commercial products and cloud services revenue increased 12%

 

 

Office Consumer products and cloud services revenue increased 11%

 

 

LinkedIn revenue increased 20%

 

 

Dynamics products and cloud services revenue increased 14%

 

 

Server products and cloud services revenue increased 27%

 

 

Enterprise Services revenue increased 5%

 

 

Windows Commercial products and cloud services revenue increased 18%

 

 

Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 9%

 

 

Surface revenue increased 8%

 

 

Xbox content and services revenue increased 11%

 

 

Search advertising revenue, excluding traffic acquisition costs, was relatively unchanged

Percentages are year-over-year. See Annex A for a reconciliation of financial measures presented under accounting principles generally accepted in the United States of America (“GAAP”) to non-GAAP financial measures. Key performance indicators are defined in our Form 10-K for the fiscal year ended June 30, 2020.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

   

    Continuing Superior Shareholder Returns    

 

   
     

Total Shareholder Return

through June 30, 2020

(includes reinvestment of dividends)

 

 

 

Total Shareholder Return during Mr. Nadella’s CEO

Tenure: MSFT vs. S&P500

Feb. 4, 2014 through June 30, 2020

(includes reinvestment of dividends)

   

LOGO

 

 

LOGO

 

Building for the Future

We believe advancing the Company’s value over the long-term involves not only achieving consistently strong results, but investing in a trusted technology ecosystem, healthier societies, and a sustainable environment. The economic and social disruption provided the opportunity to our executive leadership to reflect and act concretely upon the modern corporation’s purpose. Mr. Nadella articulated this purpose as the creation of profitable solutions to the challenges of people and planet in every community in every country around the world.

We announced multiple initiatives and investments in fiscal year 2020. Our digital skills program aims to expand access to the technical capabilities needed in the modern workplace and into the future, particularly for those with lower incomes, women, and underrepresented minorities. We are taking concrete action to address racial injustice and inequity by improving the experience of Blacks and African Americans at Microsoft, by working to increase diversity among our suppliers and partners, and by strengthening our communities through the power of data, technology, and partnership. We also increased resources to our Justice Reform Initiative to address racial inequities in the criminal justice system. In 2020 we redoubled our commitment to sustainability by making available $1 billion to invest in innovative climate solutions, and by setting a goal to be carbon negative by 2030. To advance trust, our organizations that promote the responsible use of artificial intelligence deepened their engagement with both our internal engineering groups to embed responsible practices into our products, and with external regulators and stakeholders to advocate for regulations that enable technologies such as AI and facial recognition to benefit society at large. These programs reflect the growing momentum of our social and environmental commitments, which continue to accelerate despite the disruptions of the COVID-19 pandemic. With the encouragement and guidance of the Board, we have built concrete and ambitious commitments for these programs to ensure progress and accountability.

Success in fiscal year 2020 required – more urgently than almost any other year – intense focus on business operations, agility to adapt to rapidly changing circumstances, strategic vision and excellence, and advancement of a world view that embraces challenges bigger than the Company, some that linger from our past and others that loom in our future. Mr. Nadella and his senior leadership team’s success in rising to these challenges supports compensation decisions made for fiscal year 2020 performance.

 


 

2020 PROXY STATEMENT  33


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

 

Section 2 – Executive Compensation Program Enhancements

Shareholder Engagement

 

Our executive compensation program is grounded in a compensation philosophy aimed at achieving strong alignment between our long-term strategic goals and our shareholders’ interests. Feedback received from our shareholders through ongoing engagement discussions informs our Compensation Committee’s deliberations as it reviews the incentive structures in place on an ongoing basis.

 

Our Board and our Compensation Committee deeply value the continued interest of and feedback from our shareholders on our executive compensation program and are committed to maintaining an active dialogue with them to ensure their perspectives are thoughtfully taken into account.

       

  Shareholder Engagement  

 

   
       
     

 

Engaged with shareholders

owning 48% of shares in FY20

 

   
     

 

“Virtual Shareholder Listening

Tour” in the first quarter

of FY21 with new

Compensation Committee

Chair and Board Chair

 

   

We carefully consider both the level of voting support from our shareholders on our say-on-pay vote, as well as comments from shareholders, when evaluating our executive compensation program. At the 2019 Annual Meeting, 77% of the votes cast supported our advisory resolution on the compensation of our Named Executives (“say-on-pay” vote).

As in prior years, in fiscal year 2020 we continued our active shareholder engagement program, discussing compensation and a broad range of ESG issues with shareholders representing a total of 48% of our shares outstanding. For fiscal year 2021, we expanded our scope of shareholder outreach to obtain specific feedback on executive compensation program related matters. After assuming the Chair of the Compensation Committee, Ms. Peterson proactively sought shareholder feedback and together with our Independent Board Chair held conversations in the summer of 2020 with shareholders representing over 22% of our shares outstanding. Over the summer, management engaged additional shareholders representing another 23% of our outstanding shares to discuss executive compensation and other ESG topics.

Enhancements to Compensation Program

In discussing our compensation program throughout 2020 with investors, several key themes emerged in shareholders’ feedback. The Compensation Committee evaluated these themes and implemented enhancements to our fiscal year 2021 compensation program that both respond directly to shareholder input and further increase pay-for-performance alignment at Microsoft.

Shareholder feedback and responsive actions taken include:

 

Feedback Themes       Actions Taken

 

•  Increase the performance-based component of the annual cash incentive – to further strengthen our CEO’s accountability to achieving results on the objective financial metrics that most closely align with our business strategy

 

•  Shift the mix of our CEO’s equity award to be majority performance-based

 

•  Include a downside adjustment on the PSA payout, so that the TSR multiplier provides both upside and downside exposure for executives

 

•  Investors would benefit from additional disclosure regarding the Compensation Committee’s process to determine incentive compensation results

     

 

•  Increased the weighting of the financial performance portion of the CEO’s annual cash incentive from 50% to 70% for fiscal year 2021, split evenly between Incentive Plan Revenue (35%) and Incentive Plan Operating Income (35%)

 

•  Increased the performance-based portion of our CEO’s equity awards from 50% to 70% for fiscal 2021

 

•  Revised the relative TSR modifier for fiscal year 2021 PSAs to include a downside adjustment on PSA payout if relative TSR falls below the 40th percentile of the S&P 500

 

•  Increased the disclosure of the goal-setting process and results under PSAs

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

The following table provides a comparison of our CEO’s fiscal year 2020 and fiscal year 2021 incentive compensation program design:

 

Pay Element    

  FY20 Elements / Metrics / Weightings     FY21 Elements / Metrics / Weightings  

Annual    

Cash    

Incentives    

 

Financial

• Incentive Plan Revenue (25%)

• Incentive Plan Operating Income (25%)

 

 

50%

 

 

Financial (new)

• Incentive Plan Revenue (35%)

• Incentive Plan Operating Income (35%)

 

 

70%

 

 

 

Operational

• Product & Strategy (16.67%)

• Customers & Stakeholders (16.67%)

• Culture & Organizational Leadership (16.66%)

 

 

50%

 

 

 

Operational (new)

• Product & Strategy (10%)

• Customers & Stakeholders (10%)

• Culture & Organizational Leadership (10%)

 

 

30%

 

Long-Term    

Equity    

 

Performance Stock Award

Three, one-year performance periods with following metrics:

• Commercial Cloud Revenue (35%)

• Commercial Cloud Subscribers (34%)

• Teams Monthly Active Usage (10%)

• Xbox Game Pass Subscribers (7%)

• Surface Revenue (7%)

• LinkedIn Sessions (7%)

 

 

50%

 

 

Performance Stock Award (new)

Three, one-year performance periods with following metrics:

• Commercial Cloud Revenue (33%)

• Commercial Cloud Subscribers (32%)

• Teams Monthly Active Usage (20%)

• Xbox Game Pass Subscribers (5%)

• Surface Revenue (5%)

• LinkedIn Sessions (5%)

 

 

70%

 

 

 

Relative TSR multiplier (1-1.5x) is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500

 

 

 

 

Relative TSR modifier has been revised to include a downside adjustment if relative TSR falls below the 40th percentile of the S&P 500

 

 

   

Stock Award

• Four-year ratable vesting

 

 

50%

 

 

Stock Award (no change)

• Four-year ratable vesting

 

 

30%

 

 

   

 

    2020 vs. 2021 CEO Pay Mix    

 

   
     
 

After these changes, Mr. Nadella’s pay mix will change from fiscal year 2020 to fiscal year 2021 as follows:

 

 

LOGO

 

 


 

2020 PROXY STATEMENT  35


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

 

Section 3 – Pay Setting

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

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

Executive Compensation Philosophy

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

 

 

Provides a competitive total pay opportunity

 

 

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

 

 

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

 

 

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

 

 

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

Competitive Pay

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

Our Compensation Peer Group

To ensure that our Board and Compensation Committee have current information to set appropriate compensation levels, we conduct an executive compensation market analysis each year that draws from third-party compensation surveys and publicly available data for a group of peer companies. We supplement this analysis with additional market information specific to each executive officer’s role and responsibilities, including information gleaned from our experience recruiting for executive positions at Microsoft. While this market analysis and supplemental data inform the decisions of the independent Board members and our Compensation Committee on the range of compensation opportunities, we do not tie executive officer compensation to specific market percentiles. Because other companies actively recruit our executive officers to fill CEO and other senior leadership positions, we supplement market information with data on external opportunities potentially available to our executive officers. We also consider the relationship of annual target compensation among internal peers. In addition, our Committee is provided with an overview of compensation for our non-executive Microsoft employees and how this compensation relates to Mr. Nadella’s compensation.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

In setting our fiscal year 2020 executive compensation design and compensation levels, we considered pay practices at the largest technology and general industry companies that were selected after review of three primary screening criteria: market capitalization, revenue, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Our Compensation Committee selected this peer group because it believed these companies are led by executives with similarly complex roles and responsibilities. The Committee also screened these companies to ensure they had a significant presence outside the U.S. and excluded companies in the financial services sector because of the different regulatory environment in which they operate. For fiscal year 2020, this compensation peer group comprised these companies:

 

   

 

    Peer Group Used for Fiscal Year 2020 Pay Analysis    

($ millions)

    
      
   
  

 

  Peer Company    Market
Capitalization
     Revenue      EBITDA       

 

 

 

 

Technology

    

 

 

 

 

 

    

 

 

 

 

 

    

 

 

 

 

 

   

 

 

 

 

Alphabet

     $966,497        $166,030        $46,035      

 

 

 

 

Amazon

     $1,376,033        $321,782        $39,575      

 

 

 

 

Apple

     $1,581,165        $273,857        $78,671      

 

 

 

 

Cisco Systems

     $196,928        $49,301        $15,912      

 

 

 

 

Facebook

     $647,453        $75,157        $34,084      

 

 

 

 

IBM

     $107,231        $75,499        $15,577      

 

 

 

 

Intel

     $253,320        $78,955        $38,119      

 

 

 

 

Oracle

     $169,606        $39,068        $16,330      

 

 

 

 

Qualcomm

     $102,605        $19,999        $4,890      

 

 

 

 

General Industry

    

 

 

 

 

 

    

 

 

 

 

 

    

 

 

 

 

 

   

 

 

 

 

AT&T

     $215,389        $175,138        $54,417      

 

 

 

 

Boeing

     $103,441        $66,606        -$1,033      

 

 

 

 

Chevron

     $166,591        $114,984        $20,357      

 

 

 

 

Coca-Cola

     $191,896        $34,326        $11,249      

 

 

 

 

Comcast

     $177,911        $105,549        $32,971      

 

 

 

 

ExxonMobil

     $189,086        $213,857        $23,639      

 

 

 

 

Johnson & Johnson

     $370,503        $80,503        $27,210      

 

 

 

 

Merck

     $195,189        $47,194        $19,046      

 

 

 

 

PepsiCo

     $183,511        $67,654        $12,360      

 

 

 

 

Pfizer

     $181,643        $49,197        $20,055      

 

 

 

 

Procter & Gamble

     $296,013        $70,950        $19,185      

 

 

 

 

Verizon

     $228,128        $129,726        $47,511      

 

 

 

 

Walmart

     $339,211        $542,026        $33,816      

 

 

 

 

Walt Disney

     $201,417        $69,762        $11,879      

 

   
   

Microsoft

     $1,543,306        $143,015        $65,259      

 

  

 

 

 

99%ile

 

 

  

 

 

 

74%ile

 

 

  

 

 

 

97%ile

 

 

   

 

                                    

The following graph shows Microsoft’s position within the peer group on the three screening criteria (in billions).

 

           Min        25th
Percentile
       50th
Percentile
       75th
Percentile
    MSFT        Max  
                            
                                                                

EBITDA

         -$1          $16          $20          $36      

 

$65  

 

 

 

       $79  
                                                                
                            
                                                                

Revenue

         $20          $58          $75          $148      

 

$143  

 

 

 

       $542  
                                                                
                            
                                                                

Market Cap

         $103          $180          $197          $318      

 

$1,543  

 

 

 

       $1,581  
                                                                

 


 

2020 PROXY STATEMENT  37


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Peer Group Used for Fiscal Year 2021 Pay Analysis

For fiscal year 2021, the Compensation Committee reviewed the evolution of our business against our historical peer group, and as a result approved the use of two peer groups with two components to better reflect the differentiated business, talent and, in some cases, pay models, across sectors:

 

1)   Primary Peer Group of bellwether technology companies, which reflect Microsoft’s more direct competitors for executive talent

 

2)   Secondary Peer Group of “large cap” general industry companies, which reflect the complexities of operating large, global, innovative businesses and Microsoft’s broader competition for executive talent

The companies in the fiscal 2021 peer group are:

  Primary Peer Group – Technology

 

           

  Adobe

  Alphabet                

 

Amazon

Apple

 

Cisco Systems

Facebook

 

IBM

Intel

 

Oracle

Qualcomm

  Salesforce

 

  Secondary Peer Group – General Industry

 
           

  Accenture

  AT&T

 

Comcast

Honeywell

 

Johnson & Johnson

Merck

 

Pfizer

Procter & Gamble

 

Tesla

Walt Disney

  Verizon

Performance-Based Pay and Goal Setting

Our incentive compensation arrangements are tied to specific performance measures that drive long-term performance and value creation. For fiscal year 2020:

 

 

56% of our Named Executives’ annual target compensation opportunity was performance-based, on average

 

 

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

 

 

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

 

 

Management and the Compensation Committee discussed in detail the metrics that determine performance stock awards to ensure they are leading indicators that will drive long-term performance and value creation

 

 

Performance stock awards included a relative TSR multiplier to reward significant positive outperformance, thereby strengthening the alignment of the interests of our executive officers with the long-term interests of our shareholders

As described above, in response to investor feedback, for fiscal year 2021 we are increasing the proportion of our CEO pay that is weighted toward objective, financial performance goals, with 70% of the annual cash incentive tied to pre-established financial metrics and 70% of the equity award in the form of PSAs. In addition, for all of our executive officers, in fiscal year 2021 we have added a downward adjustment to the relative TSR modifier so that payouts will be reduced for TSR performance below the 40th percentile of the S&P 500.

The Compensation Committee sets cash incentive and PSA metric targets at the levels established, after review and engagement by the Board, for internal budgeting purposes. These targets are intended to be challenging but achievable. The Committee then determines thresholds, maximums, and interim payout levels after considering historical data, upside/downside scenarios, analytics, and year-over-year growth comparisons, to ensure rigorous alignment of payouts to performance. Where we have strong historical data, as with the Revenue and Operating Income measures used to determine 50% of the annual cash incentive (70% for the CEO in fiscal year 2021), we set thresholds at an estimated 90% probability of payout, and maximums at an estimated 20% probability of payout. Where we do not have strong historical data that will allow for probability estimates, as is the case with our more recently developed PSA metrics, we set thresholds that we believe are reasonably achievable and maximums that we believe can be reached only with exceptional performance. The Committee actively reviews the appropriateness of payout thresholds and maximums for each metric. The Committee focuses on ensuring that our challenging goals, when achieved, will result in shareholder value creation and, historically, our performance on these challenging goals has led to substantial returns to our shareholders.

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Pay Mix

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

 

 

   

 

    Pay Mix Versus Peers    

 

    
      

 

 

LOGO

 

Percentages derived by comparing the fiscal year 2020 target compensation levels for our Named Executives to the average of these amounts for the named executive officers of our compensation peer group companies using data available in mid-2019 when our Compensation Committee conducted our fiscal year 2020 compensation planning.

 

 

   

    Compensation Best Practices    

 

    
      

What We Do

 

  

What We Don’t Do

 

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

 

•  Have a strong executive compensation recovery (“clawback”) policy to ensure accountability

 

•  Promote long-term focus through multi-year vesting and performance requirements

 

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

 

•  Retain an independent compensation consultant

 

•  Solicit investor feedback on our compensation program and potential enhancements through an extensive shareholder engagement program

  

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

 

•  No employment agreements

 

•  No change in control benefits

 

•  No executive-only retirement programs

 

•  No guaranteed bonuses

 

•  No dividends paid on unvested stock awards

 

•  No encouragement of unnecessary and excessive risk taking

      

 


 

2020 PROXY STATEMENT  39


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

 

Section 4 – Fiscal Year 2020 Compensation Program Design

Consistent with our philosophy, the compensation program for our Named Executives in fiscal year 2020 consisted of an annual base salary plus annual cash and equity incentives awarded under our Executive Incentive Plan (“Incentive Plan”).

Annual cash incentives were performance-based, with 50% determined formulaically based on achievement against pre-established financial targets and 50% determined based on operational performance in three weighted performance categories. As noted above in the section titled Enhancements to Compensation Program, for fiscal year 2021, in response to investor feedback 70% of our CEO’s annual cash incentive will be determined based on formulaic achievement against pre-established financial targets and 30% will be determined based on operational performance in three weighted performance categories. The Compensation Committee believes this will strengthen the CEO’s accountability to achieving results on the objective financial metrics that most closely align with our business strategy.

Equity incentives under the Incentive Plan were allocated 50% to target performance stock awards (“PSAs”) and 50% to stock awards with four-year vesting (“SAs”). The Compensation Committee and the independent Board members believed the 50/50 balance between PSAs and SAs appropriately supported our long-term business goals and long-term retention incentives for our Named Executives. As noted above, in response to investor feedback, for fiscal year 2021 our CEO will receive 70% of his stock awards as PSAs. The Compensation Committee believes this will strengthen the alignment of pay and performance for our CEO.

Base Salaries

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

Annual Cash Incentives

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

 

 

LOGO

 

*

“Incentive Plan Revenue” and “Incentive Plan Operating Income” are non-GAAP financial measures defined on pages 43-44.

Financial

We include financial results in our cash incentive to measure our success in meeting internal annual financial performance goals for revenue and profitability that we believe drive long-term value creation.

For fiscal year 2020, the financial formulaic portion of the annual cash incentives were determined based on meeting pre-established performance targets for Incentive Plan Revenue and Incentive Plan Operating Income. The fiscal year 2020 Incentive Plan Revenue and Incentive Plan Operating Income performance targets were based on meeting the Company’s internal fiscal year 2020 operating budget and were higher than our fiscal year 2019 actual performance for both metrics, further reflecting appropriately ambitious performance goals.

 


 

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1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Operational Assessment

The operational assessment portion of each Named Executive’s fiscal year 2020 annual cash incentives was determined based on assessment of individual performance against financial, operational, and strategic indicators in three performance categories. The performance indicators varied based on the Named Executive’s responsibilities and the function or group he or she leads, and may have included (in alphabetical order in each category):

 

 

  LOGO

 

 

 

   Product & Strategy   

 

           

 

  LOGO

 

 

 

   Customers & Stakeholders   

 

         

 

  LOGO

 

 

 

   Culture & Organizational       Leadership

 

  
                                
   

 

•  Efficiency and productivity

 

•  Innovation

 

•  Product development and implementation of strategic roadmap

 

•  Quality

 

•  Revenue, consumption, and market share

 

                  

 

•  Customer and partner engagement and outreach

 

•  Customer satisfaction

 

•  Developer engagement  

 

• Progress on Environmental, Social, and Governance goals

             

 

•  Compliance and integrity

 

•  Culture

 

•  Diversity and inclusion

 

•  Organizational health

    

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

 

 

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

 

 

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

 

 

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

Equity Compensation

Under the Incentive Plan, each year our Named Executives receive both PSAs and SAs.

Performance Stock Awards

PSAs are designed to encourage our executives to achieve strong goals in key performance metrics selected to drive long-term performance and value creation.

Due to the dynamic nature of our business and the specificity in the performance metrics that are chosen under our PSA program, we believe that measuring performance annually over our three-year performance period and modifying awards based on our three-year relative TSR results provides the most accurate assessment of our Company’s long-term trajectory and performance achievements.

 


 

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Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Fiscal Year 2020 Performance Stock Award Metrics and Weights

Fiscal year 2020 PSA metrics are strategic measures that drive long-term performance and value creation. Targets for the PSA metrics are set at the target levels established under Microsoft’s fiscal year business plan and are intended to be difficult but attainable, and additional information about our goal-setting process is on page 38. The metrics and weights used for fiscal year 2020 are in the table below.

 

   

    Fiscal Year 2020 PSA Metrics    

 

    
      
    Performance Metrics        Description    Weights    
   
   

Commercial Cloud Revenue*  

 

       Net revenue for commercial cloud-based solutions, including Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties    35%    
   
    Commercial Cloud Subscribers        Paid seats for current or new per-user SaaS cloud services primarily in commercial customer segment    34%    
   
   

Teams Monthly

Active Usage

       Unique monthly active users of Teams in Enterprise, Corporate, Small and Medium Business, and Education    10%    
   
    Xbox Game Pass Subscribers        Current number of paid Game Pass Subscriptions (Console, PC, Ultimate)    7%    
   
    Surface Revenue*        Net revenue for Surface branded family of devices and accessories (excluding revenue from Surface Hub 1)    7%    
   
    LinkedIn Sessions        Measure of member visits as a leading indicator of the overall quality of the LinkedIn member experience and opportunity for members to realize their economic opportunity    7%    
 

 

* “Commercial Cloud Revenue” and “Surface Revenue”, when used as PSA metrics in this Compensation Discussion and Analysis, are non-GAAP financial measures defined on page 48.

 

The fiscal year 2020 PSA metrics were used to establish performance goals for (1) year 3 of the 2018 PSAs, (2) year 2 of the 2019 PSAs, and (3) year 1 of the 2020 PSAs, as shown below.

 

   

    PSA Metrics    

 

   
     

 

LOGO

 

Our fiscal year 2020 PSA metric results can be found on pages 48-49 below.

 

 


 

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GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Stock Awards

SAs were granted under the Incentive Plan in September 2019 for shares of Microsoft common stock. These SAs vest over four years (25% on August 31, 2020 and 12.5% each six-months thereafter) to support long-term focus and align with shareholders’ interests. Vesting is subject to continued employment except as described on page 50 below.

No Other Fiscal Year 2020 Compensation

During fiscal year 2020, no other compensation was awarded to our Named Executives.

 

 

Section 5 – Fiscal Year 2020 Compensation Decisions

Our Named Executives were awarded the following compensation in fiscal year 2020:

Fiscal Year 2020 Base Salaries

We did not increase our Named Executives’ base salaries in fiscal year 2020. We believe our Named Executives’ salary levels continue to be appropriate and reasonable given their roles, capabilities, and experience.

Fiscal Year 2020 Cash Incentive Awards

We did not increase our target percentages for cash incentive awards in fiscal year 2020, which are measured as a percentage of base salary for fiscal year 2020, which were: Satya Nadella – 300%; Amy Hood – 250%; Jean-Philippe Courtois – 225%; Margaret Johnson – 200%; and Bradford Smith – 250%.

Our Compensation Committee and, for Mr. Nadella, the independent members of our Board, determined the fiscal year 2020 cash incentive awards. These were based on two performance categories: financial results and operational performance results.

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

 

  

 

   Nadella        Hood        Courtois        Johnson1        Smith  

Financial results (50%)

     146.46%          146.46%          146.46%          146.46%          146.46%  

Operational results (50%)

     146.66%          160.00%          150.00%          100.00%          160.00%  

Total FY20 cash incentive (% of target)

     146.56%          153.23%          148.23%          123.23%          153.23%  

Total FY20 cash incentive ($)

     $10,992,000          $3,734,981          $2,591,432          $1,762,189          $3,294,445  

 

(1)

Ms. Johnson resigned her position as an executive officer of the Company effective July 1, 2020.

Financial Results

We achieved greater than target performance on the fiscal year 2020 financial performance measures shown below, notwithstanding the challenges of COVID-19, resulting in a weighted payout of 146.46%. Our FY20 target for Incentive Plan Revenue was over 110% of our FY19 actual result, and we achieved 101% of this target in FY20. Our FY20 target for Incentive Plan Operating Income was over 110% of our FY19 actual results, and we achieved 109% of this target in FY20.

 

Financial Results (50% weight)

($ in billions)

  

FY19

Actual

       FY20
Threshold
      

FY20

Target

       FY20
Maximum
      

FY20

Actual

 

FY20 Incentive Plan Revenue

     $135.25          $141.70          $149.01          $155.58          $150.14  

FY20 Incentive Plan Operating Income

     $44.29          $45.05          $48.71          $54.56          $53.14  

“Incentive Plan Revenue” and “Incentive Plan Operating Income” are non-GAAP financial measures. We calculate Incentive Plan Revenue by adjusting GAAP Revenue for (1) the net impact of revenue deferrals, (2) credits and incentives, and (3) the effect of foreign currency rate fluctuations. We calculate Incentive Plan Operating Income by adjusting GAAP Operating Income for the effect of foreign currency rate fluctuations. We exclude the effect of foreign currency rate fluctuations on a “constant dollar” basis by converting current period non-GAAP (i.e., adjusted for the items in the preceding two sentences) results for entities reporting in currencies other than U.S. dollars into U.S. dollars using constant exchange rates, which are determined at the outset of the current

 


 

2020 PROXY STATEMENT  43


Table of Contents
1  

 

GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

period, rather than the actual exchange rates in effect during the respective periods. These Incentive Plan financial metrics differ from the non-GAAP financial results we report in our quarterly earnings release materials. They should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

 

Operational Results

 

Satya Nadella

 

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

      LOGO

 

   

    Weighted Performance Categories - Satya Nadella     

 

   
     
   

1 Product & Strategy (33.3% weight)

       

 

     LOGO  130%    

    
   
 

 

 

During fiscal year 2020, Microsoft increased revenue by 14% year over year, while facing unprecedented constraints due to COVID-19 in the second half of the year. Under Mr. Nadella’s leadership during 2020, many of Microsoft’s products achieved significant growth, especially in the commercial cloud business, where revenue increased 36% to $51.7 billion. Other notable results included GitHub registered developers exceeding 50 million and Xbox Game Pass subscriptions surpassing 10 million. While Microsoft is constantly striving to lead across our product categories, there is more work to do in driving solutions that will get Microsoft to market faster.

 

Mr. Nadella led Microsoft’s acceleration of the optimization of many products and capabilities in 2020. He directed the management team to lean forward and intentionally build integral skills that became necessary in the face of the year’s challenges, including enabling deeper capabilities for businesses to quickly and securely transition to remote work. His focus areas included our Azure cloud to make it easier for customers to harness data through the cloud, leverage artificial intelligence, and embrace the internet of things, as more work is required to be done at a distance; democratizing data transparency and the ability to enhance business processes; and ensuring security and privacy of proprietary data at a time where data origin is becoming more important to the global commerce landscape.

    

 

   
   

2 Customers & Stakeholders (33.3% weight)

       

 

     LOGO  150%    

    
   
 

 

 

Mr. Nadella embraced the idea that Microsoft’s purpose is to create profitable solutions to the challenges of people and planet in every community in every country around the world. MSFT (TSR +52%) outperformed the S&P 500 (up 5% in fiscal year 2020) and the NASDAQ (up 24% in fiscal year 2020). The Board views his strong leadership of the Company’s actions in response to the unique challenges of 2020 as unparalleled. Under Mr. Nadella’s leadership, Microsoft continued its work to strengthen communities throughout the world through the power of data, technology, and partnership. Mr. Nadella focused the Company on driving global impact in privacy legislation, Responsible AI standards, and Digital Safety in order to help public institutions around the world deal with the growing concerns facing them at this unique time.

 

Mr. Nadella led Microsoft’s transformation in response to COVID-19, including devoting technology and resources to ensure customers, such as government agencies, schools, medical facilities, and other front-line responders, had the virtual collaboration and other digital tools to successfully navigate the unprecedented challenges of 2020. This critical leadership motivated the teams within Microsoft to lean in even more to help customers. Mr. Nadella also guided the Company to pioneer new technology solutions to business challenges caused by the pandemic and offer them to customers to use as they navigate similar issues.

    

 

          

 


 

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  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

         
   

3 Culture & Organizational Leadership (33.3% weight)

           

 

LOGO  160%

    
   
 

 

 

The Board asked Mr. Nadella to create additional focus on the culture of the organization for fiscal year 2020 and is very pleased with the results that were achieved. Employee sentiment for Microsoft continues to be strongly positive. Based on poll data, 95% of employees feel proud to work at Microsoft. The Board credits Mr. Nadella for his tremendous progress driving cultural change across the organization, especially given the unprecedented impact of COVID-19 on our business and our people.

 

Under Mr. Nadella’s leadership, Microsoft acted early to enable secure, remote work and adopt other measures to protect the health and well-being of our workforce, while ensuring the continuity of our operations for the many organizations that rely on Microsoft products and services to serve their customers or citizens.

 

Mr. Nadella has enthusiastically fostered a culture of stewardship. During 2020, Microsoft redoubled its commitment to sustainability by making available $1 billion to invest in innovative climate solutions and by setting an ambitious goal to be carbon negative by 2030. Microsoft also took concrete actions to address racial injustice and inequity by improving the experience of Blacks and African Americans at Microsoft, by working to increase diversity among our suppliers and partners, and by strengthening our communities through the power of data, technology, and partnership. In fiscal year 2020, 91% of employees said Microsoft creates an environment where people of diverse backgrounds can succeed. Microsoft also increased resources to our Justice Reform Initiative to address racial inequities in the criminal justice system. Demonstrating strong foresight for how the economy will recover, Mr. Nadella led Microsoft to announce a global skills initiative aimed at bringing digital skills to 25 million people worldwide by the end of 2020.

    

 

          

Other Named Executives

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

 

Named Executive

   Key Results

Amy E. Hood

  

•  Strong financial performance and management with double digit revenue growth of 14% and operating income growth of 23%, and returned over $35 billion in cash to shareholders in the form of share repurchases and dividends

 

•  Despite economic uncertainty, drove effective communication to investors regarding the Company’s strategic goals and momentum, driving total shareholder return of 52%, which has outperformed NASDAQ (up 24%) and the S&P 500 (up 5%) since June 30, 2019

 

•  Partnered across the organization to launch large scale initiatives such as the sustainability commitment, including the $1 billion Climate Investment Fund for carbon-reduction technology

 

•  Champion of diversity and inclusion across the finance organization and broader Microsoft, launching multi-year sustained initiatives in the Company’s business ecosystem to address racial injustice and inequity for the Black and African Americans in the United States

 

•  Supported external and internal COVID-19 response including supporting customer and supplier financing needs and developing Microsoft facilities plans and PPE procurement. Maintained agility and business continuity through robust financial rhythms with core processes accomplished remotely

 


 

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GOVERNANCE AND        
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING        
THE MEETING

  5  

 

INFORMATION            
ABOUT THE
MEETING

 

 

     

 

Named Executive

   Key Results

Jean-Philippe Courtois

  

•  Led Global Sales, Marketing, and Operations (“GSMO”) groups to deliver strong financial performance and contributed to the commercial cloud business surpassing $50 billion in revenue for the first time – up 36% year over year

 

•  Further positioned Microsoft as the cloud technology provider of choice leading to an increase in Microsoft’s share of the cloud market, with additional focus on net customer adds. Worked closely with customers to help them use technology to sustain business and organizational continuity in the face of COVID-19

 

•  Drove an increase in customer rating for providing deep industry expertise and enhanced competitive positioning of Microsoft’s services

 

•  Seamlessly enabled remote work for global workforce leveraging Microsoft 365 and the underlying infrastructure, allowing teams to support customer needs with agility and speed

 

•  Strong investment in coaching managers through new Manager Excellence framework of Model, Coach, Care to enhance the culture of inclusion. Further embedded diversity and inclusion conversations and learning moments through all levels of employees within the field

Margaret L. Johnson

  

•  Enhanced Microsoft’s presence as a top corporate venture capital investor with strategic investments through Microsoft’s venture fund, M12

 

•  Built upon deep industry relationships leading to new growth opportunities across the portfolio

 

•  Developed a partnership with Mayfield and Pivotal Ventures, to invest and help create a more equitable playing field for innovative female founders

 

•  Expanded relationships with “unicorn” growth companies and helped build Azure presence in challenging markets

 

•  Championed diversity and inclusion within the business development organization and across the Company

Bradford L. Smith

  

•  Led a comprehensive sustainability initiative for carbon, biodiversity, and water, with an industry-leading commitment to become carbon negative by 2030

 

•  Launched the Responsible AI Standard to set the rules for enacting responsible AI and secured the world’s first safeguards on facial recognition in a new Washington State law

 

•  Championed and grew diverse representation internally and drove the launch of multiyear sustained efforts to leverage the use of data, technology, and partnerships in community-oriented efforts to help improve the lives of Black and African American citizens in the United States, including strengthening and expanding the Company’s Justice Reform Initiative

 

•  Partnered across Microsoft, GitHub, and LinkedIn to establish the Global Skills Initiative to bring digital skills to 25 million people worldwide by the end of 2020 – the most ambitious and comprehensive skilling initiative in the Company’s history

 

•  Supported COVID-19 response externally through AI for Health, privacy principles for COVID-19, and by expanding Microsoft Philanthropy’s support for non-profits that assist first responders

 


 

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GOVERNANCE AND
OUR BOARD OF
DIRECTORS

 

  2  

 

NAMED
EXECUTIVE OFFICER
COMPENSATION

      3  

 

AUDIT
COMMITTEE        
MATTERS

  4  

 

PROPOSALS TO
BE VOTED ON DURING
THE MEETING

  5  

 

INFORMATION
ABOUT THE
MEETING

 

 

     

 

Fiscal Year 2020 Stock Awards

For fiscal year 2020, target value of stock awards for our Named Executives remained the same as for fiscal year 2019. The fiscal year 2020 PSAs and SAs granted to our Named Executives under the Incentive Plan are listed below.

 

Named Executive

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

Satya Nadella

   90,672    90,672    25,000,000

Amy E. Hood

   40,621    40,621    11,200,000

Jean-Philippe Courtois

   27,202    27,202    7,500,000

Margaret L. Johnson

   18,135    18,135    5,000,000

Bradford L. Smith

   33,368    33,368    9,200,000

 

(1)

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

 

(2)

The SAs vest 25% on August 31, 2020 (September 18, 2020 for Mr. Courtois) and 12.5% each six months thereafter until fully vested. Vesting is subject to continued employment except as described on page 50 below.

 

(3)

Awarded value (in dollars) was converted to shares using the closing share price on August 30, 2019, rounded up to a whole number.

The amounts listed in the table above for fiscal year 2020 PSAs will not match the amounts in the Stock Award column in the Summary Compensation Table or the Grants of Plan-Based Awards table. Because the grant date of a PSA occurs when the performance targets are set, and targets under our PSA awards are established annually, SAs listed in the Summary Compensation Table and Grants of Plan-Based Awards table include portions of current and prior year PSA awards, as described in more detail in Note (1) to the Summary Compensation Table on page 53.

Fiscal Year 2018 PSAs (Completed Performance Period)

Our Compensation Committee (and for Mr. Nadella, the independent members of our Board) granted PSAs in fiscal year 2018 that pay out based on specific pre-established, performance goals and strategic performance objectives tied to creating long-term shareholder value. Performance was measured over the three-fiscal year performance period ending June 30, 2020.

The actual performance under the fiscal year 2018 PSAs reflected the strong business achievement on core metrics and Microsoft’s relative TSR during this period. Performance on the core metrics under these PSAs is shown in the following table:

 


 

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