Microsoft promises Nadella up to $18M for fiscal year 2015
However, Nadella's biggest potential payout will come from stock grants. For fiscal 2015 -- and each year following -- he will receive stock worth about $13.2 million. At Wednesday's closing price, that amount would have purchased more than 368,000 shares.
Microsoft is also kicking in a one-time stock grant, dubbed "Long-Term Performance Stock Awards," or LTPSAs, that could hand him as many as 2.7 million shares over the next seven years. At Wednesday's closing price, that number of shares would be worth approximately $96.7 million.
Nadella may not receive the maximum LTPSAs, as the Microsoft board has tied them to Microsoft's "total shareholder return" (TSR) relative to the Standard & Poor 500's performance over three overlapping five-year periods.
TSR is a combination of share price appreciation and dividends paid to shareholders.
The better Microsoft's TSR performs compared to the S&P 500, the more shares vest for Nadella, with the maximum of 900,000 shares each of the three periods contingent on Microsoft being in the 90th percentile. He could, however, get nothing if Microsoft's TSR is in the cellar.
It's become common practice for boards to tie stock awards to the TSR, said Buford, who noted that such grants are often called "performance awards" because they reward market performance by a company and theoretically motivate CEOs to grow the company's revenue and make other moves that boost shareholder value.
Apple, for instance, changed CEO Tim Cook's 1 million-share stock award last year to link it to the company's TSR rather than simply hand him shares on a pre-set schedule.
The one thing that struck Buford in Microsoft's filings about Nadella's compensation was the vagueness of the criteria used to reward him with an annual cash bonus. "The lack of specifics to some of the performance metrics is unusual," said Buford.
In the filing with the SEC, Microsoft simply said that Nadella's bonus "will be based on your performance as evaluated by the Board."
"I'm pretty sure Ballmer had the same thing for his cash award, but there is nothing spelled out, which is unusual," Buford added. Most companies put the bonus criteria down in black and white.
Previously Microsoft dealt out large stock awards to other senior executives in an effort, it said, to hold onto them during and after the CEO selection process.
Last September, Microsoft handed out stock grants now worth about $63 million to eight executives -- including COO Kevin Turner and Tony Bates, who now leads business development and evangelism -- in a new retention program meant to keep those people at the company. Both Turner and Bates were reportedly considered for the CEO spot that Nadella eventually won.
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