Microsoft Pay Raises: The Death Of Growth

There are at least two ways to look at the cash pay raises that Microsoft (NASDAQ: MSFT)  will give employees.  One is that it is a way to retain talent. Another is that it is a way to attract talent. The former is almost certainly the case.

Microsoft has struggled mightily to retain its investor base since Steve Ballmer took the CEO role. In 2004, it gave shareholders a special $3 dividend and created a share buyback. The world’s largest software firm said the payment was to give stockholders some of the company’s large cash balance. Most analysts saw it as a shareholder retention program.

Microsoft now pays one of the richest dividends of any tech company. Its yield is 2.5%. It has been followed into the dividend paying business by other slow growth/ cash rich companies such as  Cisco (NASDAQ: CSCO).

Microsoft has the obvious problem that stock options are not attractive when they are for the shares in a firm with a stagnant price. The media said Microsoft wants to keep talented employees with higher cash compensation. It will not work. The best engineers want to labor at places like Groupon and Facebook. The reason is not entirely options that will make them rich. There is also the attraction of working at firms that are on the cutting edge of technology and online communication. Microsoft has no way to duplicate those things.

Microsoft may have one chance to retain its best people, but it is complex and disruptive. The firm could partially spin out some of its most promising operations like its cloud computing division and virtualization operations. That would give engineers and project managers a chance to work  on the leading edge of important technology. It would also destroy the morale of anyone left behind to work on legacy products and projects.

Not all business problems can be solved by good management and ingenuity. American business history is full of examples. Now that Microsoft is an old company, it must defend its old products which it partially cannibalizes with new one. Its employees can see that clearly.

Douglas A. McIntyre