ISS says Microsoft’s Nadella is paid too much

Institutional investment advisor blasts Microsoft CEO's $91M pay package for 2014, recommends that shareholders vote 'No' next month

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A prominent adviser to big-time investors has urged clients to vote against Microsoft's pay package for its new CEO, Satya Nadella, saying that his compensation this year was out of whack when compared to competing companies and the firm's track record.

Institutional Shareholder Services (ISS), which advises institutional shareholders, recommended that they cast a "No" vote at Microsoft's shareholder meeting two weeks from today.

ISS blasted Microsoft's entire approach to Nadella's compensation, calling his February stock grant a "mega equity award," arguing that his annual incentive stock plan "lacks a strong connection to objectively measured company performance," and noting that millions will be handed to him simply because he's there.

"The departure of former CEO Ballmer presented a number of challenges, including executive retention concerns and the need to design a compensation structure for new CEO Nadella, who, unlike his predecessors, was not a major stakeholder," ISS wrote in its report to clients. "[But] even in consideration of these challenges, significant concerns are raised by Nadella's new compensation package."

For Microsoft's fiscal 2014, which ended June 30, Nadella received nearly $919,000 in salary, $3.6 million as a cash bonus, and approximately $65 million as an equity starter kit, according to earlier filings with the U.S. Securities and Exchange Commission (SEC).

Last year, Nadella was given a stock grant worth an estimated $13.5 million as part of a retention plan Microsoft used to keep several executives in place as its board searched for a new CEO when Ballmer announced his retirement. And in September, Nadella received another $13.6 million as his annual stock-based award.

All of Nadella's equity grants vest over multiple years, and in some cases will be tied to Microsoft's market performance.

Microsoft has defended Nadella's compensation, most recently in the proxy statement filed last month. "To focus Mr. Nadella on improving returns for shareholders over the long term, while at the same time providing him the opportunity to build significant ownership and share in those returns when he achieves strong, sustainable performance, the independent members of our Board granted him the LTPSA," the proxy said of the large initial award given to Nadella earlier this year.

ISS still didn't care for Nadella's compensation and criticized the deal's lax criteria, which would give the CEO 25% of the targeted amount even if Microsoft's "total shareholder return" (TSR) was in the bottom 30% of the S&P 500.

Nor did the advisory firm like how Microsoft's board decided how much to give Nadella, as well as other top executives, in yearly cash bonuses and incentive awards, claiming neither was metrics based, but "ultimately determined at the committee's discretion."

ISS also hammered on the idea that Nadella's 2014 compensation -- which it estimated at $90.8 million -- was very high when compared to corporate peers. According to ISS, Nadella's number was nearly six times higher than the median for peer CEOs.

Others, though, were okay with Nadella's pay, or accepted it with some caveats.

Bob Buford, a Portland, Ore.-based compensation consultant, reiterated his belief that Nadella's compensation, although large, was within the technology ballpark. "If you look at the history of Microsoft specifically, and technology in general, they're all pretty aggressive payers," Buford said in a phone interview Wednesday. "This doesn't stick out like a sore thumb."

And the large up-front grant to Nadella, while not standard practice when someone takes over from a founder or from someone there since the beginning, has precedents. "Apple did pretty much the same thing," Buford said, referring to the massive one-million share grant given to Tim Cook in 2011 when he took over from an ailing Steve Jobs.

And Glass, Lewis & Co., another top proxy advisor, recommended that investors approve Microsoft's executive compensation plans, including Nadella's. "The considerable changes in the Company's strategy and management over the past fiscal year, the unique context surrounding the previous CEOs and the Company's generally adequate record of aligning pay with performance have mitigated our concerns to a sufficient degree at this time," the firm told its clients.

The vote on executive compensation is non-binding, which means that the board can ignore a thumbs down. "It really depends on the magnitude, if there is a 'No' vote," said Buford. "If the magnitude is large, the board may then reconsider its compensation practice, but it would highly unusual to take action on an individual basis."

Microsoft will hold its annual shareholders meeting on Wednesday, Dec. 3, when stockholders will vote on executive pay packages and elect people to the board.

Nadella's compensation from ISS Institutional Shareholder Services

Proxy advisor ISS charted the last five years of Microsoft CEO compensation against the firm's 'total shareholder return' to bolster its belief that Satya Nadella is overpaid.

Copyright © 2014 IDG Communications, Inc.

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