The Director Compensation Project: Microsoft

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2010’s Fortune 500 and using information found in their most recent proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes "any compensation."  Rules 303A.06 and 5605 also require that, in addition to the general independence standards, audit committee members must comport with the requirements of  Rule 10A-3 (C.F.R. §240.10A-3).  See also IM-5605-4. Audit Committee Composition.

One can see some of the effects of these rules when looking at the director compensation table from Microsoft’s (NASDAQ: MSFT) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
James I. Cash, Jr.*	50,000	60,000	0	0	110,000
Dina Dublon	100,000	120,000	0	0	220,000
William H. Gates III	80,000	120,000	0	0	200,000
Raymond V. Gilmartin	90,000	120,000	0	0	210,000
Reed Hastings	80,000	120,000	0	0	200,000
Maria Klawe	80,000	120,000	0	0	200,000
David F. Marquardt	90,000	120,000	0	0	210,000
Charles H. Noski	100,000	120,000	0	0	220,000
Helmut Panke	90,000	120,000	0	0	210,000

*Compensation amount reflects fees earned through retirement date.

Director Compensation.  During the 2010 fiscal year, Microsoft held seven Board of Directors meetings and 28 Board Committee meetings.  Each director attended at least 75% of both the Board meetings and his or her committee meetings. Other various director meetings take place each year in addition to the quarterly meetings.  Each director, with the exception of James I. Cash, Jr., receives an annual retainer of $200,000, and $120,000 of this retainer is in the form of stock awards.  Chairs of Board committees receive an additional $10,000, and members of the Audit Committee also receive an additional $10,000.  Directors are reimbursed for “reasonable expenses incurred in connection with Board-related activities.”  As a benefit, directors are each given a personal computer and printer.  Directors may receive an “additional personal computing device and a game or media player device,” as well as software and subscription services for Microsoft.  The aggregate value of the items provided to directors must not exceed $10,000 per director.

Director Tenure.  William H. Gates, a cofounder of Microsoft, and David F. Marquardt have been directors of Microsoft since 1981.  They both have held the longest tenure of any director.  The newest directors are Maria Klawe, who has served since 2009, and Reed Hastings, who has served since 2007.  During the past five years, all but one director has served on other boards.  Charles H. Noski has served on the boards of Merrill Lynch & Co., Air Products and Chemicals, Inc., Automatic Data Processing, Inc., Morgan Stanley, and Northrop Grumman Corporation; Mr. Noski has served on the most boards of any other Microsoft director.  Mr. Gates has served on the boards of Berkshire Hathaway Inc. and ICOS Corporation.

CEO Compensation.  B. Kevin Turner, who serves as Microsoft’s Chief Operating Officer, earned $10,445,000 during the fiscal year.  Robert J. Bach, who serves as the President of the Entertainment and Devices Division, earned $7,645,000 during the fiscal year.  Base salary and Incentive Plan awards are the central components of the executive officers’ salaries.  Mr. Bach resigned effective December 31, 2010 and will only receive 25% of the 2010 fiscal year Incentive Plan award payable in stock.  Steven A. Ballmer was named Microsoft’s Chief Executive Officer in January 2000, but is not the highest paid executive officer.  In 2010, Mr. Ballmer earned $1,340,000.  Mr. Ballmer has been a director of Microsoft since 2000 and the head of various Microsoft divisions throughout the past 30 years.