Microsoft Compensation Metrics and Why They Matter

On October 16th, Microsoft released its 2018 proxy statement to the SEC.  Included in the document are the leadership compensation metrics that can provide insight into some of the behavior displayed by Microsoft sales executives tasked with expanding their enterprise customer’s portfolio of cloud-based products as part of renewal discussions.

Around 36% of the compensation plan for executives at Microsoft comes from Performance Stock Awards (PSA).  PSAs further break down as follows:

  • Commercial Cloud revenue (34%)
    • Net revenue for commercial cloud-based solutions, including Office 365 commercial, Microsoft Azure, Dynamics 365, and other cloud properties
  • Commercial Cloud subscribers (33%)
    • Paid seats for current or new per-user SaaS cloud services primarily in the commercial customer segment
  • Windows 10 monthly active devices (11%)
    • All Windows 10 monthly active devices, including PCs, tablets, mobile devices, gaming consoles, and Internet of things devices
  • Consumer post-sales monetization gross margin (11%)
  • LinkedIn sessions (6%)
  • Surface gross margin (5%)

The proxy statement also informs us that the new Incentive Plan Revenue Definition has changed to focus on revenue based on customer billings, which better aligns with the overall company performance incentives.  This isn’t the first time that Microsoft has talked about the change in their compensation model.  In an interview with Simon London of McKinsey Quarterly in April of this year, CEO Satya Nadella described in a bit more detail some of the data that Microsoft tracks in order to determine compensation.  Nadella explains, “We track metrics such as monthly actives, monthly active versus daily active ratios, consumption, and consumption growth.  These are all the things that we measure as much as we measure any end-quarter revenue or profit by segment.  And these are tied to compensation.”

Nadella says that it’s not just the leadership team — the sales culture has been aligned with the top.  EVP Judson Althoff reinforced this statement at the Citi Global Technology Conference in September when he shared, “Less than 20% of the compensation plan for any of our people is tied to what they might sell to a customer. We pay our people on what our customers use and the value that they get out of our solutions.”

Landing and Expanding Enterprise Customers

Microsoft, from the leadership level down to the sales account executive, ultimately wants to land and expand within their base of enterprise customers by making sure that they have what they need to be successful (i.e., they are actually using the products they are buying or subscribing to), especially when it comes to the adoption of Microsoft cloud products like Office 365 or even the bundled solution Microsoft 365.  This will lead to a continued level of interest and appetite along with a willingness to continue to adopt more cloud products and solutions like Azure, which will not only result in market share expansion but also revenue growth.  Along with this, Microsoft is creating even greater vendor lock-in.

Customers using Microsoft 365 can account for almost 80% of executive PSAs, while Office 365 customers track to ~67%.  Since Nadella and Althoff talk about making the compensation model seemingly universal throughout the company trickling down to the sales executives, it’s not a surprise why they are aggressively trying to shift your portfolio to one that is a majority in the cloud.  There is no question that they track this internally and if your enterprise is still very much an old-school on-premise customer, expect your sales executive to work very hard to grab an audience with as many people as they can within the company (line of business executives, IT, etc.) to influence a move to the cloud.

Nudging Companies to the Cloud

Microsoft is also influencing this behavior by making traditional on-premise products like Project and Visio now only offered in online forms, forcing companies to float to the cloud if they are not leaping in immediately. Customers should be very wary of Microsoft pushing for the adoption of cloud products, whether it be for the first time with a product like Office 365, the addition of more cloud solutions like Azure, or moving up from Office 365 to a more robust cloud bundle like Microsoft 365.

Beyond obtaining the proper upfront discounting and pricing along with the long-term price protection commitments in order to motivate a move to the cloud, customers need to ensure they have obtained the proper level of investment, such as the no-cost consulting that Judson Althoff also mentioned at the Citi Global Conference, in order to ensure successful adoption and utilization.  Based on the behavior and the recently revealed compensation changes throughout Microsoft, it is clear they want to help customers expand and utilize their cloud products, but it is on them to also make it more enticing for customers to make the leap.

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