Saturday, November 22, 2014

Microsoft: Satya Nadella's Compensation as CEO (2014)

Microsoft Company logo
For most people, the company Microsoft is synonymous with “Windows” and “MS-DOS”. It’s true, Microsoft Corporation primarily focuses on the development, licensing, and support of a myriad of software packages. In particular, the application suite Microsoft Office and the operating system Microsoft Windows are their most successful and well-known software packages. In addition, Microsoft has their own web browser (Internet Explorer), search engine (Bing), instant messenger (MSN), e-mail server (Outlook), video/voice chat application (Skype), and many more software products. In the past several years, Microsoft has also taken on hardware endeavors with a gaming console (Xbox), mobile phone (Windows Phone), media players (Zune), tablets (Microsoft Surface), and more.
As a corporation in the technology industry, Microsoft is among the most valuable with $86.83B in revenue for fiscal year 2014. Also, several of Microsoft’s products hold a majority market share among their competitors. The most dominating product line is Microsoft Windows in the PC operating system market. Between Windows 8, Windows 8.1, Windows 7, and Windows Vista, the “Windows” operating system holds a staggering 91.91% of the operating system market.
Aside from Microsoft being a massively successful technology corporation, former CEO and chairman of Microsoft Bill Gates is currently the wealthiest person in the United States with a net worth of approximately $81B according to the current Forbes 400 list. The second CEO of Microsoft, Steve Ballmer, held this position from January 2000 to February 2014. Ballmer's net worth is also quite impressive at $22B; he is the current owner of the Los Angeles Clippers and owns 4% of Microsoft's stocks. Now, the focus of this article is on Microsoft's newest CEO, Satya Nadella. Nadella was previously the Executive Vice President of Microsoft's Cloud and Enterprise group. Nadella's new position is certainly a lucrative one: Satya Nadella will be receiving $84 million from Microsoft during his first year as CEO. (Bort)
When I researched Satya Nadella's compensation as CEO earlier in the semester, it was reported that his base salary was expected to be $1.2 million. When considered cash bonuses and stock incentives that are usually awarded to CEOs, it was speculated that Nadella could receive a total compensation of around $18 million. However, following company filing that Microsoft did recently, it was revealed that Nadella will be receiving much more than $18 million. His compensation, totaling at $84 million, is broken down as follows:

• base salary of $918,917
• cash bonus of $3.6 million
• one-time grant of stock - $59.2 million. (Won't be able to cash in until 2019)
• additional one-time stock grant (Bort)

Granted, not counting the one-time stock grants, his compensation will be nearer to the $18 million that was originally perceived. Compared to other CEOs of similar technology corporations, Nadella's compensation isn't astronomical. Here's what others received as first-year tech CEOs:

• Marissa Mayer was paid $36.6 million for her first year as Yahoo's CEO
• Tim Cook of Apple received $378 million for his first year as CEO. Similar to Nadella's situation, a significant portion of this compensation was in the form of one-time stock grants. His yearly pay now is around $4.3 million.
• Oracle has two co-CEOs, Safra Catz and Mark Hurd, both of which made $37.7 million for their first year. Furthermore, Larry Ellison is making $67 million this year. (Bort)

It seems Nadella's compensation as Microsoft's CEO isn't astounding compared to other tech CEOs. In addition to employing four different ethical analyses to evaluate the ethical merit of Nadella’s compensation from Microsoft, I'll also be referring to the bigger picture here: the widening gap between CEOs and their employees in the corporate world.

Satya Nadella, CEO of Microsoft
As with any business action, there are stakeholders for Satya Nadella’s compensation as the CEO of Microsoft. Firstly, Satya himself is a primary stakeholder as he is the person receiving the compensation given by Microsoft. Employees of Microsoft are internal stakeholders as they should be concerned with how the executives are compensated versus themselves. Also, shareholders are stakeholders since a new CEO may change how the corporation is structured or performed. In addition, a big chunk of Nadella’s portion is stock incentives, so his earnings are directly proportional to how Microsoft’s stock will change in the coming year. Therefore, Microsoft as a corporate entity can be considered a shareholder; they are "investing" in Satya Nadella with the expectation that he'll be moving the company forward.

Within the scope of individualism, Microsoft giving Satya Nadella a “generous” salary for his first year as CEO is ethical. The ethical rule of Individualism is: "Business actions should maximize profits for the owners of a business, but do so within the law" (Salazar 17). A business under the belief of individualism tends to give incentive to their employees to perform well via compensation. Microsoft has been effective in this way since Nadella’s total compensation could amount to $84 million for his first 12 months as CEO (Bort). However, Microsoft also compensates their employees generously. For instance, the average salary of a software engineer is around $116,000, 14% above the market normal (Glassdoor). When you consider that Microsoft’s revenue for fiscal year 2014 was $86.83 billion, there’s no doubting that Microsoft can afford to compensate their CEO and software engineers the way they do (Microsoft). Therefore, under an individualism context, Microsoft is being ethical with how much its paying its employees, particularly Nadella. A corporation that pays its employees well and has exceptional revenue is actually achieving Friedman’s business ideals. This creates competition among employees to outperform each other, sparking innovation by finding new ways to cut costs and increase efficiency within processes or systems.
While the concept of individualism meshes well with this particular situation, it fails to grasp the bigger picture: The widening wealth gap between executives and their employees. Although it’s within Microsoft’s right and well within their budget to reward Nadella and his employees generously, is it necessary? According to individualism, there is nothing wrong here.

Employing the utilitarianism mindset in this situation is a bit more complex. Utilitarianism is a theory in which an action’s ethical value is determined by the long-term happiness that it provides to all stakeholders of the business and its decision (Salazar 19). So, unlike individualism, there is more to consider than the benefits that each individual receives from how Microsoft pays its employees. Therefore, the ethical value of this situation from a utilitarian point of view is more of a gray area than through individualism. In the long run, some employees may feel jealousy and contempt that their executives get paid up to or over 200x more than them. This is the major drawback since Microsoft’s change in profit would be negligible if Nadella was paid $1,000,000 a year as opposed to the $84 million he'll be receiving in his first year. Overall, the costs are small. On the other hand, the benefit is that Nadella should be incentivized to perform well under his role as CEO, especially since $13.2 million of his compensation is stock rewards for fiscal year 2015. In other words, his performance is entwined to his compensation and the financial status of Microsoft. The difficult part in determining the ethical value of Nadella’s compensation is comparing the costs (disgruntled employees) to the benefits (Nadella potentially improving Microsoft in a positive way). There can be arguments on both sides, whether the costs outweigh the benefits or vice versa. In this situation, both the costs and the benefits are long-term are difficult to quantify.

Microsoft headquarters in Redmond, WA
Kantianism is an ethical theory that focuses more on human nature and “doing the right thing" principles are the pillar of Kantianism as opposed to utility and profit for utilitarianism and individualism respectively. Kantianism’s belief is centered around good will and in ethical decision making, avoiding immoral actions such as lying, stealing and cheating. Again, within the context of Nadella’s compensation as CEO of Microsoft, there is nothing explicitly immoral here that would violate Kantian beliefs. The rationality of the amount that Nadella will be receiving ($84 million in the first 12 months) is up for debate. While it is around 200 times more than the average Microsoft employee, it’s still well within Microsoft’s budget. And while Microsoft is paying Nadella particularly well, it doesn’t really violate the Categorical Imperative. The Categorical Imperative, or the formula for humanity “states that it is wrong to use people as a mere means to get what you want. Treating someone as a mere means uses them or exploits them. It disregards their rationality and freedom and usually it involves an attempt to manipulate them” (Salazar 22). Since Nadella is getting paid for his work, which implies that his performance along with Microsoft’s performance affects his pay, it’s not sensible to say that he is being manipulated by the corporation in any way. The moral worth, however, is a bit more questionable. What if Microsoft pays Nadella the same amount that it paid Steve Ballmer, the previous CEO of Microsoft, the same salary at $700,000 (Pollock, Calia)? And what if the remaining money was used for employee bonuses or additional undergraduate scholarships? This action would be closer to ideal from a Kantian perspective, since helping others is the right thing to do. However, the decision that Microsoft made does not label them as immoral as far as Kantianism goes.

Virtue Theory
Lastly, virtue theory will be applied to determine the ethical value of Microsoft paying its new CEO, Satya Nadella, up to $84 million during his first year. Seeing as the decision was made by as a corporation, it’s a bit awkward to employ virtue theory since it clearly maps to a person’s character. However, in this situation Microsoft could be considered a “person” and his virtue questioned. Since there are innumerable virtues and vices that could be considered, the main virtues that will be evaluated are courage, honesty, temperance, and justice (the four virtues of business) (PH 211-53 PowerPoint). First off, Microsoft was courageous in their decision: Satya Nadella’s salary can be seen as controversial by many and they’re preparing to justify their action if need be. Microsoft is also courageous in the fact that they're willing to compensate Nadella so graciously with the expectation that it will pay off. Next, Microsoft is forced to be honest since they have to disclose the terms of the CEO’s compensation. Temperance and justice both fall in a grey area since the reasonability and justification for Nadella’s $84 million pay is open to interpretation.


Pollock, Lauren and Calia, Michael. "Microsoft Sets New CEO's Pay at $1.2 Million." The Wall Street Journal. Dow Jones & Company, n.d. Web. 21 Nov. 2014.

Bort, Julie. "Microsoft Is Paying CEO Satya Nadella $84 Million." Business Insider. n.d. Web. 21 Nov. 2014

Salazar, Heather The Case Manual. Print.

"Average Salary for Microsoft Corp Employees." Microsoft Corporation Salaries. Glassdoor, n.d. Web. 18 Oct. 2014.

"Microsoft Facts - Revenue/Headcount." N.p., n.d. Web 21 Nov. 2014.

PH 211-53 PowerPoint 5: Business Ethics and Virtue

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