Microsoft vs. Google – executive compensation

May 18

The course project for Corporate Finance this session involves an analysis of two competing companies, at least one of which is on the Dow. Sources suggested for information include http://finance.yahoo.comhttp://www.morningstar.com and http://www.sec.gov/. Additional insights may be available in the Wall Street Journal.

Choice of Microsoft and Google

The first question involves a comparison of executive compensation between the two companies chosen. Since I own a software business, I chose Microsoft (MSFT) and Google (GOOG) as competing companies for my evaluation. In the software space, these two companies also represent very different approaches to software design, development and consumer consumption of the end result.

Business Models

Before I jump in to my analysis, it might be worth mentioning that, while both are software companies, they follow different business models. Microsoft has been more of a traditional software company, selling software as a product. That includes packaging, distribution, wholesale, OEM and other supply chain concerns. Google has been a software as a service (SaaS) company from the beginning. Delivery of their products has been almost exclusively online.

Both companies have deviated from their roots in recent years. For example, Microsoft is attempting to move into the cloud  and services space with offerings like Bing, Azure and Office Online. Meanwhile, Google has been moving into a product space with their Android devices and Chromebooks. Google’s purchase of Motorola is further evidence of their interest in the product space.

 Compensation Analysis

The professor suggested that the 10-k filing would be a good place to get information for this project. Unfortunately, the 10-k filing section for Executive Compensation only made a reference to a Proxy document. I did a little more digging and discovered that I could find the Proxy statement using these steps:

  • Go to http://www.sec.gov/
  • In the main search type the company name (ticker symbol doesn’t work). Also make sure the option next to search has “company filings” selected.
  • Click the link under the “CIK” column for the company you want. Multiple results will come up. In my experience, you want the result with the SIC value in the description, as shown below.
  • In the “filter results” panel near the top, type “DEF” into the “Filter Type” box
  • Results are sorted by filing date by default. Choose the top result to get the latest filing.

sec-comany-selection

 

In some cases, there are a lot of proxy statements. These may include items as trivial as announcements or voting details.  You may need to hunt around a bit to find the right one. Dates also seem to vary significantly from one company to another. I’m not sure how frequently these are updated.

Components of Executive Compensation

In the case of Microsoft and Google, the executive compensation is broken down into various components. The two primary components common to both companies are

  • Pay based on performance
  • Other or fixed pay

Who gets Executive Compensation

Each company names a handful of individuals in the executive pay section. Based on other compensation strategies at the company, including those set by the compensation committees, there doesn’t appear to be a significant deviation in terms of payment structures. The additional scrutiny seems to be justified by the magnitude of the compensation as compared with other employees.

  • Steven A. Ballmer, our Chief Executive Officer (and our principal executive officer)
  • Peter S. Klein, our Chief Financial Officer (and our principal financial officer)
  • Kurt D. DelBene, our President, Microsoft Office Division
  • Steven J. Sinofsky, our President Windows and Windows Live Division
  • B. Kevin Turner, our Chief Operating Officer
  • Larry Page Chief Executive Officer (CEO)
  • Sergey Brin Co-Founder
  • Eric E. Schmidt Executive Chairman of the Board of Directors (Executive Chairman)
  • Patrick Pichette Senior Vice President and Chief Financial Officer (CFO)
  • Nikesh Arora Senior Vice President and Chief Business Officer
  • David C. Drummond Senior Vice President, Corporate Development, Chief Legal Officer, and Secretary

Compensation philosophies and rhetoric

There are some interesting differences between the two companies in terms of their compensation philosophy. For example, the  first information Google includes is a summary explaining that executive compensation and employee compensation are governed by the same policies. There is a big focus on the health and well being of the employee and his family. Google executives receive a nominal fixed pay indicating that the majority of their wealth originates in the stock they own in the company. This quote also stood out to me about the lack of so called “golden parachutes” at Google:

None of our named executive officers have any type of employment agreement or severance arrangement with us.

On the other hand, Microsoft jumps right in to numbers, many of which indicate performance, both company wide and by segment. Microsoft’s compensation philosophy centers on the individual executive and is designed to motivate him to reduce overall risk.

It would be interesting to contrast the culture of risk to innovation of these two companies.

Both companies also review the compensation practices and levels of peer companies. By doing this it seems they want to appear to be normalizing compensation across the C tier of executives in an industry. Whether that happens with such a small sample and broad variance is another matter for debate. Each company includes the other in it’s peer review.

Actual Compensation for 2012

Actual compensation values came from MorningStar for Google and Microsoft.

Name/Title 2012
Key Executive Compensation 33,601,092
Steven A. Ballmer/Chief Executive Officer and Director 1,318,128
Peter Klein/Chief Financial Officer 5,108,836
B. Kevin Turner/Chief Operating Officer 10,683,671
Steven Sinofsky/President Windows and Windows Live Division 8,583,732
Kurt Delbene/President Microsoft Office Division 7,906,725
Name/Title 2012
Key Executive Compensation 128,817,458
Larry Page/Chief Executive Officer 1
Patrick Pichette/Senior Vice President and Chief Financial Officer 38,741,106
Nikesh Arora/Senior Vice President and Chief Business Officer 51,145,868
David C. Drummond/Senior Vice President, Corporate Development, Chief Legal Officer and Secretary 31,301,858
Eric E. Schmidt/Executive Chairman of the Board of Directors 7,628,624
Sergey Brin/Co-Founder 1

Despite the fact that Larry and Sergey took only one dollar in actual compensation, the total executive compensation at Google was about four times greater than at Microsoft. That may also be a reflection of the performance for each company.

Agency Problems

It’s interesting that in both cases, the operations officer or business development officer is the highest paid. It’a also interesting that the CEO is among the lowest paid. In the case of Google, they have attempted to perfectly align with shareholder interests

Larry and Sergey have voluntarily elected to receive only nominal cash compensation. As significant stockholders, a large portion of their personal wealth is tied directly to Google’s stock price performance, which provides direct alignment of their interests with stockholder interests.

At Microsoft, the higher compensation for the CEO, than his counterpart at Google, is somewhat insignificant compared to the value of the stock he owns in Microsoft. As a result, he seems about as well aligned as his counterparts at Google with the shareholder interest.

When it comes to perks, the Google culture is much more generous than Microsoft. It could be seen that free meals, shuttle buses and 20% time are extravagances and would conflict with the principle’s ideas about expenditure of funds. However, when the culture at Google also innovates at the level it has for so many years, it’s difficult to argue against their strategy and policy for hiring and retaining the best talent in the world.

Peer groups

It’s interesting that both of these companies made it in to a peer group when compensation policies were put in place, yet the executive compensation varies significantly. Whether it’s the founders of Google taking $1, or the nearly $50 million paid to the Chief Business Officer at Google, these companies clearly have a different approach to executive compensation.

2 comments

  1. Nancy Truong /

    Hi Daniel,

    I was wondering if you know what is the internal alignment or the external competitiveness for each of these companies?

    • Hi Nancy,

      I’m not sure what you mean with that question. Internal alignment of what? If you’re asking how competitive Google and Microsoft are with respect to their compensation of executives, I would expect them to be at the higher end simply due to the amount of capital each company has.

Leave a Reply

Your email address will not be published. Required fields are marked *