PARKING FACILITY AND DRIVING DIRECTIONS

 

 

 

DRIVING DIRECTIONS		PARKING
•      From Seattle via SR-520:   •      Take SR-520 east to I-405 south. •      Take Exit 13A west to NE 4th Street westbound. •      Turn right onto 112th Ave NE. •      Turn left onto NE 6th Street to Meydenbauer Center’s parking garage on the right.		Due to limited parking availability, we encourage you to explore Metro Transit’s commuter services. The Bellevue Transit Center is conveniently located less than a block from Meydenbauer Center.   Parking validation for the Meydenbauer Center garage will be available at the meeting.
•      From Seattle via I-90:   •      Take I-90 east to I-405 north. •      Take Exit 13A west to NE 4th Street westbound. •      Turn right onto 112th Avenue NE. •      Turn left onto NE 6th Street to Meydenbauer Center’s parking garage on right.

September 29, 2008

 

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of Microsoft Corporation, which will be held at the Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004, on November 19, 2008, at 8:00 a.m. Doors open at 7:00 a.m. and a product fair will also open at that time. Driving directions to the Meydenbauer Center can be found on the inside front cover of this document. Parking will be validated only for the Meydenbauer Center garage. Please note that parking is limited, so plan ahead if you are driving to the meeting.

The attached Notice of Annual Meeting and Proxy Statement contain details of the business to be conducted at the Annual Meeting.

As he announced earlier this year, Jon Shirley is retiring from the Board of Directors and will not be standing for re-election. Jon has helped lead the Company for 25 years through his service as President and Chief Operating Officer from 1983 to 1990, and as a director since 1983. We want to express our sincere appreciation to Jon for his many valuable contributions to the success of the Company; we wish him the very best for the future.

Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to promptly vote and submit your proxy by phone, via the Internet, or by signing, dating, and returning the enclosed proxy card in the enclosed envelope. If you decide to attend the Annual Meeting, you will be able to vote in person, even if you have previously submitted your proxy.

We will provide live coverage of the Annual Meeting from the Microsoft Investor Relations Web site at www.microsoft.com/msft. In addition, the transcript along with video and audio of the entire Annual Meeting of Shareholders will be available on the Investor Relations Web site after the meeting. We hope this will allow those of you who are unable to attend the meeting to hear Microsoft executives discuss the year’s results.

On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in the affairs of Microsoft. I look forward to greeting as many of our shareholders as possible.

Sincerely,

Steven A. Ballmer

Chief Executive Officer

The use of cameras at the Annual Meeting is prohibited and they will not be allowed into the meeting or any other related areas, except by credentialed media. We realize that many cellular phones have built-in digital cameras; while these phones may be brought into the venue, the camera function may not be used at any time.

 

		2008 PROXY STATEMENT

MICROSOFT CORPORATION

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

November 19, 2008

 

To the Shareholders:

The Annual Meeting of the Shareholders of Microsoft Corporation will be held at the Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004, on November 19, 2008, at 8:00 a.m. for the following purposes:

 

1.

To elect nine directors from among the nominees described in this Proxy Statement.

2.

To approve material terms of the performance criteria under the Executive Officer Incentive Plan.

3.

To approve amendments to the 1999 Stock Option Plan for Non-Employee Directors.

4.

To ratify the selection of Deloitte & Touche LLP as our independent auditor for fiscal year 2009.

5.

To consider three shareholder proposals described in the accompanying Proxy Statement, if properly presented at the Annual Meeting.

6.

To transact such other business as may properly come before the meeting.

Only shareholders of record at the close of business on September 5, 2008 are entitled to notice of, and to vote at, this meeting.

By order of the Board of Directors

Bradford L. Smith

Secretary

Redmond, Washington

September 29, 2008

IMPORTANT

Whether or not you expect to attend the Annual Meeting in person, we urge you to vote your shares at your earliest convenience. This will ensure the presence of a quorum at the meeting. Promptly voting your shares by telephone, via the Internet, or by signing, dating, and returning the enclosed proxy card will save us the expenses and extra work of additional solicitation. An addressed envelope for which no postage is required if mailed in the United States is enclosed if you wish to vote by mail. Submitting your proxy now will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option.

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on November 19, 1008. Our Proxy Statement and Annual Report to Shareholders are available at www.microsoft.com/msft/reports/default.mspx.

 

		2008 PROXY STATEMENT

MICROSOFT CORPORATION

ONE MICROSOFT WAY

REDMOND, WASHINGTON 98052

 

PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD NOVEMBER 19, 2008

This Proxy Statement was first mailed to shareholders on or about October 3, 2008. It is furnished in connection with the solicitation of proxies by the Board of Directors of Microsoft Corporation, to be voted at the Annual Meeting of Shareholders for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting of Shareholders will be held at 8:00 a.m. on November 19, 2008 at the Meydenbauer Center, 11100 NE 6th Street, Bellevue, Washington 98004. Shareholders who execute proxies retain the right to revoke them at any time before the shares are voted by proxy at the meeting. A shareholder may revoke a proxy by delivering a signed statement to our Corporate Secretary at or prior to the Annual Meeting or by timely executing and delivering, by mail, Internet, telephone, or in person at the Annual Meeting, another proxy dated as of a later date. Microsoft will pay the cost of solicitation of proxies.

Shareholders of record at the close of business on September 5, 2008 will be entitled to vote at the meeting on the basis of one vote for each share held. On September 5, 2008, there were 9,055,478,726 shares of common stock outstanding, held of record by 145,633 shareholders.

PROPOSAL 1

ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION

The Company’s Board of Directors currently consists of ten members. Jon A. Shirley is retiring from the Board effective as of the date of the Annual Meeting. In connection with Mr. Shirley’s retirement, the Board has authorized a reduction in the size of the Board to nine members effective as of November 19, 2008, as permitted by the Bylaws of Microsoft Corporation (“Bylaws”).

Nine directors are to be elected at the Annual Meeting to hold office until the next annual meeting of shareholders, and until their respective successors are elected and qualified. If, for any reason, the directors are not elected at an annual meeting, they may be elected at a special meeting of shareholders called for that purpose in the manner provided by the Bylaws. The accompanying proxy will be voted in favor of the nominees named below to serve as directors unless the shareholder indicates to the contrary on the proxy. All of the nominees are current directors.

The Board of Directors expects that each of the nominees will be available for election, but if any of them is unable to serve at the time the election occurs, the proxy will be voted for the election of another nominee to be designated by the Board of Directors.

MAJORITY VOTE STANDARD FOR DIRECTOR ELECTIONS

Microsoft’s Bylaws require that in an uncontested election each director will be elected by the vote of the majority of the votes cast. A majority of votes cast means that the number of shares cast “for” a director’s election exceeds the number of votes cast “against” that director. A share whose ballot is marked as withheld, which is otherwise present at the meeting but for which there is an abstention, or to which a shareholder gives no authority or direction shall not be considered a vote cast. In a contested election, the directors will be elected by the vote of a plurality of the votes cast.

As provided in Section 2.2 of our Bylaws, a contested election is one in which:

 

•

as of the last day for giving notice of a shareholder nominee, a shareholder has nominated a candidate for director according to the requirements of our bylaws (assuming on that day there is a candidate nominated by the board of directors for each of the director positions to be voted on at the meeting), and

•

as of the date that notice of the meeting is given, the Board of Directors considers that a shareholder candidacy has created a bona fide election contest.

In an uncontested election, a nominee who does not receive a majority vote will not be elected. Except as explained in the next paragraph, an incumbent director who is not elected because he or she does not receive a majority vote will continue to serve as a holdover director until the earliest of: (a) 90 days after the date on which an inspector determines the voting results as to that director; (b) the date on which the Board of Directors appoints an individual to fill the office held by that director; or (c) the date of the director’s resignation.

 

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The Board of Directors may fill any vacancy resulting from the non-election of a director as provided in our Bylaws. The Governance and Nominating Committee will consider promptly whether to fill the office of a nominee who fails to receive a majority vote and make a recommendation to the Board of Directors about filling the office. The Board of Directors will act on the Governance and Nominating Committee’s recommendation and within ninety (90) days after the certification of the shareholder vote will disclose publicly its decision. Except as provided in the next sentence, no director who fails to receive a majority vote for election will participate in the Governance and Nominating Committee recommendation or Board decision about filling his or her office. If no director receives a majority vote in an uncontested election, then the incumbent directors (a) will nominate a slate of directors and hold a special meeting for the purpose of electing those nominees as soon as practicable, and (b) may in the interim fill one or more offices with the same director(s) who will continue in office until their successors are elected.

For additional information, the complete Bylaws are available on our Web site at http://www.microsoft.com/ about/companyinformation/corporategovernance/default.mspx.

Our Board recommends a vote FOR the election to the Board of each of the following nominees:

NOMINEES

William H. Gates III, 52, a co-founder of Microsoft, has served as Chairman since our incorporation in 1981. Mr. Gates retired as an employee effective July 1, 2008, but will continue to serve as Chairman and an advisor on key development projects. Mr. Gates served as Chief Software Architect from January 2000 until June 2006, when he announced his two-year plan for transition out of a day-to-day full-time employee role. Mr. Gates served as our Chief Executive Officer from 1981 until January 2000, when he resigned as Chief Executive Officer and assumed the position of Chief Software Architect. Mr. Gates is also a director of Berkshire Hathaway Inc.

Steven A. Ballmer, 52, has been a director since 2000. Mr. Ballmer has headed several Microsoft divisions during the past 28 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President, a role that gave him day-to-day responsibility for running Microsoft. He was named Microsoft’s Chief Executive Officer in January 2000, assuming full management responsibility.

James I. Cash, Jr., Ph.D., 60, has been a director since 2001. Dr. Cash is Emeritus James E. Robison Professor of Business Administration at Harvard Business School, where he served as Senior Associate Dean and Chairman of HBS Publishing. Dr. Cash is also a member of the board of directors of The Chubb Corporation, General Electric Company, Phase Forward Incorporated, and Wal-Mart Stores, Inc.

Dina Dublon, 55, has been a director since 2005. From December 1998 until her retirement in September 2004, Ms. Dublon served as Executive Vice President and Chief Financial Officer of JPMorgan Chase. Ms. Dublon joined Chemical Bank’s capital markets group as a trainee on the trading floor in 1981. Prior to joining Chemical Bank, Ms. Dublon worked for the Harvard Business School and Bank Hapoalim in Israel. Ms. Dublon is also a member of the board of directors of Accenture Ltd. and PepsiCo, Inc.

Raymond V. Gilmartin, 67, has been a director since 2001. Mr. Gilmartin served as the Chairman of the Board, President, and Chief Executive Officer of Merck & Co., Inc. from 1994 to May 2005, when he relinquished those titles as part of the succession planning process leading up to his planned retirement in April 2006. In the interim, he served as Special Advisor to the Executive Committee of the Merck board of directors. Prior to joining Merck, Mr. Gilmartin was Chairman, President, and Chief Executive Officer of Becton Dickinson and Company. He joined that company in 1976 as Vice President, Corporate Planning, taking on positions of increasing responsibility over the next 18 years. In July 2006, Mr. Gilmartin joined the faculty of Harvard Business School as Professor of Management Practice teaching in the MBA program. Mr. Gilmartin also serves on the board of directors of General Mills, Inc.

Reed Hastings, 47, has been a director since March 2007. Mr. Hastings co-founded Netflix, Inc., in 1997 and has served as Chairman of the Board from its inception. Mr. Hastings was named Chief Executive Officer of Netflix, Inc., in September 1998. Prior to Netflix, from 1991 to 1997 Mr. Hastings was founder, Chief Executive Officer, and Chairman of Pure Software.

 

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David F. Marquardt, 59, has served as a director since 1981. Mr. Marquardt is a founding general partner of August Capital, a venture capital firm formed in 1995, and has been a general partner of various Technology Venture Investors entities, which are private venture capital limited partnerships, since August 1980. He is a director of Seagate Technology, Inc., and various privately-held companies.

Charles H. Noski, 56, has served as a director since 2003. From December 2003 to March 2005, Mr. Noski served as Corporate Vice President and Chief Financial Officer of Northrop Grumman Corporation and served as a director from November 2002 to May 2005. Mr. Noski joined AT&T in 1999 as Senior Executive Vice President and Chief Financial Officer and was named Vice Chairman of AT&T’s board of directors in 2002. Mr. Noski retired from AT&T upon the completion of its restructuring in November 2002. Prior to joining AT&T, Mr. Noski was President, Chief Operating Officer, and a member of the board of directors of Hughes Electronics Corporation, a publicly traded subsidiary of General Motors Corporation in the satellite and wireless communications business. He is a member of the American Institute of Certified Public Accountants, Financial Executives International, and the Standing Advisory Group of the Public Company Accounting Oversight Board, and is a past member of the Financial Accounting Standards Advisory Council. Mr. Noski is also a director of Air Products and Chemicals, Inc., Automatic Data Processing, Inc., and Morgan Stanley.

Dr. Helmut Panke, 62, has served as a director since 2003. Dr. Panke served as Chairman of the Board of Management of BMW Bayerische Motoren Werke AG from May 2002 through August 2006. From 1999 to 2002, he served as Member of the Board of Management for Finance. From 1996 to 1999, Dr. Panke was Member of the Board of Management for Human Resources and Information Technology. In his role as Chairman and Chief Executive Officer of BMW (US) Holding Corp. from 1993 to 1996, he was responsible for the company’s North American activities. He joined BMW in 1982. Dr. Panke is also a director of UBS AG and is a member of the supervisory board of Bayer AG.

NOMINATION OF DIRECTORS

The Governance and Nominating Committee annually reviews with the Board of Directors the applicable skills and characteristics required of Board nominees, considering current Board composition and Company circumstances. In making its recommendations to the Board, the Governance and Nominating Committee considers, among other things, the qualifications of individual director candidates. The Committee retains any search firms and approves payment of their fees. The Governance and Nominating Committee works with the Board to determine the appropriate characteristics, skills, and experiences for the Board as a whole and its individual members with the objective of having a Board with diverse backgrounds and experience in business, education, and public service. Characteristics expected of all directors include independence, integrity, high personal and professional ethics, sound business judgment, and the ability and willingness to commit sufficient time to the Board. In evaluating the suitability of individual Board members, the Board takes into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a large publicly traded company in today’s business environment; understanding of our business and technology; educational and professional background; personal accomplishment; and geographic, gender, age, and ethnic diversity. The Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of our business and represent shareholder interests through the exercise of sound judgment using its diversity of experience. In determining whether to recommend a director for re-election, the Governance and Nominating Committee also considers the director’s past attendance at meetings, participation in and contributions to the activities of the Board, and the results of the most recent Board self-evaluation. Shareholders have previously elected each of the directors submitted at the 2008 annual meeting.

The Governance and Nominating Committee will consider shareholder recommendations for candidates for the Board. The name of any recommended candidate for director, together with a brief biographical sketch, a document indicating the candidate’s willingness to serve, if elected, and evidence of the nominating shareholder’s ownership of Company stock should be sent to the attention of our General Counsel. If you wish to formally nominate a candidate you must follow the procedures described in Sections 1.3, 1.13 and 1.14 of our Bylaws.

 

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DIRECTOR INDEPENDENCE

Our Board of Directors has adopted director independence guidelines to assist in determining each director’s independence. These guidelines are available on our Web site at http://www.microsoft.com/about/ companyinformation/corporategovernance/default.mspx. The guidelines include, and either meet or exceed, the independence requirements of the NASDAQ listing standards. The guidelines identify categories of relationships that the Board has determined would not affect a director’s independence, and therefore are not considered by the Board in determining director independence.

Under the director independence guidelines, the Board must affirmatively determine that a director has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. To facilitate this determination, annually each director completes a questionnaire that provides information about relationships that might affect the determination of independence. Management provides the Governance and Nominating Committee and Board with relevant facts and circumstances of any relationship bearing on independence of a director or nominee that are outside the categories permitted under the director independence guidelines.

Based on the review and recommendation by the Governance and Nominating Committee, the Board of Directors analyzed the independence of each director and determined that the following directors meet the standards of independence under our Corporate Governance Guidelines, director independence guidelines, and applicable NASDAQ Stock Market (“NASDAQ”) listing standards, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment: Messrs. Cash, Gilmartin, Hastings, Marquardt, Noski, Panke, and Shirley, and Ms. Dublon. The Board considered that certain board members have in the past and may in the future invest in investment funds of which Mr. Marquardt is a general partner or that are managed directly or indirectly by the firm of which Mr. Marquardt is a partner.

CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES

Microsoft’s Board of Directors is committed to maintaining strong corporate governance principles and practices. The Board periodically reviews evolving legal, regulatory, and best practice developments to determine those that will best serve the interests of our shareholders, and adopts policies designed to strengthen our corporate governance framework. Microsoft’s corporate governance guidelines were most recently updated in August 2007. Highlights of Microsoft’s corporate governance framework include:

Board Independence

•

A majority of Microsoft’s board members are independent of the company and its management, and we are committed to maintaining a substantial majority of independent directors. Currently, our board has 10 directors, eight of whom are independent.

•

The independent directors meet regularly in executive session at least quarterly each fiscal year.

•

Microsoft implemented a policy for Compensation Consultant Independence, which provides that the Compensation Committee will use a consultant who is independent and devoid of other significant business relationships with management and Microsoft.

CEO, Chairman and Lead Independent Director

•

Since 2000, the roles of Chairman and Chief Executive Officer have been held separately. Mr. Gates serves as Chairman and Mr. Ballmer serves as Chief Executive Officer.

•

Since 2004, Mr. Gilmartin, an independent director, has served as Lead Independent Director, as chair of the Governance and Nominating Committee.

Board Committees

•

The Audit, Compensation, Governance and Nominating, Finance, and Antitrust Compliance Committees are comprised solely of independent directors.

•

The Board has determined that all three members of the Audit Committee are “audit committee financial experts” as defined by Securities and Exchange Commission (“SEC”) rules.

 

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Shareholder Authority

•

Microsoft has a majority vote standard for director elections. In an uncontested election, directors will be elected by the vote of the majority of votes cast. In a contested election, directors will be elected by the vote of a plurality of votes cast.

•

Microsoft does not have a classified board; directors are elected annually.

•

Microsoft has a confidential voting policy to protect our shareholders’ voting privacy.

Compensation

•

Microsoft has an executive compensation recovery policy under which the Company may recover incentive income that was based on achievement of quantitative performance targets if an executive officer engaged in intentional misconduct that resulted in an increase in his or her incentive income.

Stock Ownership

•

The Board adopted a formal stock ownership policy for directors, and stock ownership and holding requirements for Microsoft executive officers. The policies were established to promote a long-term perspective in managing the enterprise, and to align shareholder, executive and director interests.

MICROSOFT CORPORATE GOVERNANCE WEBSITE

If you would like additional information about Microsoft’s corporate governance practices, you may view the following documents at http://www.microsoft.com/about/companyinformation/corporategovernance/default.mspx:

 

•

Corporate Governance Guidelines

•

Audit Committee Charter and Responsibilities Calendar

•

Compensation Committee Charter

•

Governance and Nominating Committee Charter

•

Finance Committee Charter

•

Antitrust Compliance Committee Charter and Responsibilities Checklist

•

Amended and Restated Articles of Incorporation

•

Bylaws of Microsoft Corporation

•

Director Independence Guidelines

•

Stock Ownership and Holding Requirements for Microsoft Executives

•

Microsoft Finance Code of Professional Conduct

•

Microsoft Standards of Business Conduct

We will provide any of the foregoing information without charge upon written request to the Corporate Secretary at Microsoft Corporation, One Microsoft Way, Redmond, WA 98052-6399.

CORPORATE GOVERNANCE GUIDELINES AND COMMITTEE CHARTERS

The Corporate Governance Guidelines and the charters of the five committees of the Board of Directors describe our corporate governance practices. The Corporate Governance Guidelines and charters are intended to ensure that our Board has the necessary authority and practices in place to review and evaluate our business operations and to make decisions that are independent of management. The Corporate Governance Guidelines also are intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines establish the practices the Board follows with respect to board composition and selection, board meetings and involvement of senior management, chief executive officer performance evaluation, succession planning, board committees, and director compensation. The Board annually conducts a self-evaluation to assess compliance with the Corporate Governance Guidelines and identify opportunities to improve Board performance.

The Corporate Governance Guidelines and committee charters are reviewed periodically and updated as necessary to reflect changes in regulatory requirements and evolving oversight practices. The Corporate Governance Guidelines comply with requirements contained in the NASDAQ listing standards and otherwise enhance our corporate governance policies.

 

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MEETINGS AND MEETING ATTENDANCE

Our Board of Directors holds regularly scheduled quarterly meetings. Typically, committee meetings occur the day prior to the Board meeting. One quarter each year, the Committee and Board meetings occur on a single day so that the evening and following day can be devoted to presentations and discussions with senior management about Microsoft’s long-term strategy as part of the Board’s annual retreat. In addition to the quarterly meetings, typically there are two other regularly scheduled meetings and several special meetings each year. At each quarterly Board meeting, time is set aside for the independent directors to meet without management present. Our Board met eleven times during fiscal year 2008.

All incumbent directors attended 75% or more of the Board meetings and meetings of the committees on which they served during the last fiscal year. Directors are encouraged to attend the Annual Meeting of Shareholders. Eight directors attended the 2007 Annual Meeting.

LEAD INDEPENDENT DIRECTOR

The Chair of our Governance and Nominating Committee serves as the lead independent director. The lead independent director is responsible for coordinating the activities of the independent directors, coordinating with the Chief Executive Officer to set the agenda for Board meetings, chairing meetings of the independent directors, and leading the Board’s review of the Chief Executive Officer. See “Shareholder Communication with Directors” below on page 11 for information on how to communicate with the lead independent director.

 

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BOARD COMMITTEES

Our Board has five committees: an Audit Committee, a Compensation Committee, a Governance and Nominating Committee, a Finance Committee, and an Antitrust Compliance Committee. Each committee has a written charter. The table below provides current membership and fiscal year 2008 meeting information for each of the Board committees. Committee memberships changed during the fiscal year. In March 2008, Dina Dublon stepped down from the Finance Committee.

 

Name

Audit

Compensation

Finance

Governance & Nominating

Antitrust Compliance

Mr. Gates

Mr. Ballmer

Dr. Cash

X

X

X

*

Ms. Dublon

X

X

*

X

Mr. Gilmartin

X

*

X

Mr. Hastings

X

Mr. Marquardt

X

X

Mr. Noski

X

*

X

Dr. Panke

X

X

Mr. Shirley

X

*

Total meetings in fiscal year 2008

13

6

4

4

2

 

*

Committee Chairperson

Below is a description of each committee of our Board of Directors. Each committee has authority to engage legal counsel or other advisors or consultants as it deems appropriate to carry out its responsibilities.

Audit Committee.    The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of our accounting, auditing, and reporting practices. The Audit Committee’s role includes:

 

•

overseeing the work of our internal accounting function and internal control over financial reporting,

•

overseeing internal auditing processes,

•

inquiring about significant risks, reviewing our policies for risk assessment and risk management, and assessing the steps management has taken to control these risks, and

•

reviewing compliance with significant applicable legal, ethical, and regulatory requirements.

The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to prepare or issue audit reports on our financial statements and internal control over financial reporting. The Audit Committee relies on the expertise and knowledge of management, the internal auditors, and the independent auditor in carrying out its oversight responsibilities. The Audit Committee Responsibilities Calendar accompanying the Audit Committee Charter describes the Committee’s specific responsibilities. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee. In addition, the Board has determined that James I. Cash, Jr., Dina Dublon, and Charles H. Noski are “audit committee financial experts” as defined by Securities and Exchange Commission (“SEC”) rules.

Compensation Committee.    The primary responsibilities of the Compensation Committee are to:

 

•

assist the Board in establishing the annual goals and objectives of the Chief Executive Officer,

•

recommend to the independent members of the Board the compensation of the Chief Executive Officer,

•

oversee an evaluation of the performance of the Company’s other executive officers and approve their compensation,

•

oversee and advise the Board on the adoption of policies that govern executive officer compensation programs and other compensation-related polices,

•

oversee plans for executive officer development and succession,

 

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•

oversee administration of our equity-based compensation and other benefit plans, and

•

approve and authorize grants of equity compensation awards under our stock plan.

The Compensation Committee annually reviews the compensation paid to non-employee directors, and makes recommendations to the Board for any adjustments. The Committee may delegate the authority to make equity compensation grants. The delegation does not cover grants made to executive officers.

Our Senior Vice President, Human Resources and General Manager of Compensation, Benefits, and Performance Management support the Committee in its work. In January 2008, the Committee retained Dan Marcus, Managing Principal, Semler Brossy Consulting Group LLC to advise the Committee on marketplace trends in executive compensation, management proposals for compensation programs, and determination of named executive officer compensation. Mr. Marcus also consulted with the Committee about its recommendations to the Board on director compensation. Mr. Marcus is directly accountable to the Committee. To maintain the independence of the firm’s advice, Semler Brossy does not provide any other services for Microsoft. In June 2007, the Committee adopted a policy about compensation consultant independence that is included as Section 16 of our Corporate Governance Guidelines. This policy requires that the Committee’s compensation consultant be independent as assessed by the Committee annually. A consultant satisfying the following requirements will be considered independent.

The consultant and their firm or other organization employing the consultant:

 

•

is retained and terminated by the Committee, and reports solely to the Committee.

•

is independent of the Company,

•

will not perform any work for Company management except at the request of the Committee chair and in the capacity of the Compensation Committee’s agent, and

•

should not provide any unrelated services or products to the Company, its affiliates or management, except for surveys purchased from the consultant’s firm or organization employing the consultant.

The Committee must approve any other services performed by the consultant. The Compensation Committee annually performs an assessment of its consultant’s independence. In performing the assessment, the Committee considers the nature and amount of work performed for the Committee during the year, the nature of any unrelated services performed for the Company, and the amount of fees paid for those services in relation to the firm’s total revenues. The consultant annually prepares for the Committee an independence letter providing appropriate assurances and confirmation of the consultant’s independent status pursuant to the policy. The Committee believes that Mr. Marcus has been independent during his service for the Committee. Before January 2008, the Committee’s advisor was Mike Halloran, Worldwide Partner, Mercer. The Committee believes that Mr. Halloran was independent during his service for the Committee.

The Compensation Committee Charter describes the specific responsibilities and functions of the Compensation Committee. See “Process for Determining Named Executive Officer Compensation” below on page 13 for more information about the Committee’s work.

Governance and Nominating Committee.    The principal responsibilities of the Governance and Nominating Committee are to:

 

•

determine the slate of director nominees for election to our Board of Directors,

•

identify and recommend candidates to fill vacancies occurring between annual shareholder meetings,

•

review the composition of Board committees,

•

monitor compliance with, review, and recommend changes to the Corporate Governance Guidelines, and

•

review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to us and our stakeholders.

In addition, the Chair of the Governance and Nominating Committee acts as the lead independent director and is responsible for leading the Board of Directors’ annual performance review of our Chief Executive Officer. The Governance and Nominating Committee regularly reviews the charters of Board committees and, after consultation with the respective committee chairs, makes recommendations, if necessary, about changes to the charters. The Governance and Nominating Committee Charter describes the specific responsibilities and functions of the Governance and Nominating Committee.

 

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Finance Committee.    The Finance Committee is responsible for overseeing and making recommendations to the Board about our financial affairs and policies including:

 

•

policies relating to our cash flow, cash management, and working capital, shareholder dividends and distributions, share repurchases, and investments,

•

financial strategies,

•

policies for managing financial risk

•

tax planning and compliance, and

•

proposed mergers, acquisitions, divestitures, and strategic investments.

The Finance Committee’s role includes designating officers and employees who can execute documents and act on our behalf in the ordinary course of business under previously approved banking, borrowing, and other financing agreements. The Finance Committee Charter describes the specific responsibilities and functions of the Finance Committee.

Antitrust Compliance Committee.    The Antitrust Compliance Committee oversees the performance of the Compliance Officer, who is charged under the Final Judgment entered by the District Court for the District of Columbia in State of New York et al. v. Microsoft Corp., No. 98-1232 (the “Final Judgment”) with developing and supervising Microsoft’s internal programs and processes to ensure compliance with antitrust laws and the Final Judgment. The Compliance Officer reports directly to the Antitrust Compliance Committee and our Chief Executive Officer, and may be removed by our Chief Executive Officer only with the concurrence of the Committee. The Antitrust Compliance Committee Responsibilities Checklist attached to the Antitrust Compliance Committee Charter describes the Committee’s specific responsibilities in carrying out its oversight role. The Compliance Officer is required to maintain a record of complaints received and actions taken and to report credible evidence of violations of the Final Judgment to the Final Judgment plaintiffs. The Antitrust Compliance Committee receives regular reports from the Compliance Officer about existing and planned internal compliance programs and processes, complaints received and our response to them, and violations reported to the Final Judgment plaintiffs. In addition, the Antitrust Compliance Committee receives reports from the General Counsel and from other members of management about compliance with the Final Judgment and about other issues that may arise concerning our compliance with antitrust and competition laws. The Antitrust Compliance Committee can authorize further inquiries into matters reported to it for the purpose of ensuring the adequacy of our processes and programs for fulfilling its obligations under the Final Judgment and antitrust laws. The Antitrust Compliance Committee provides guidance to the Compliance Officer and to management and reports regularly to the Board of Directors.

DIRECTOR COMPENSATION

During fiscal year 2008 Messrs. Gates and Ballmer received no compensation for serving as directors, except that they, like all directors, are eligible to be reimbursed for any expenses incurred in attending Board and committee meetings. Each director, other than Messrs. Gates and Ballmer, is entitled to receive compensation for serving on our Board of Directors and committees of the Board as follows:

 

•

a total annual retainer of $200,000 per year with $120,000 of the retainer provided in the form of a stock award under the Amended and Restated 1999 Stock Plan for Non-Employee Directors,

•

an annual retainer of $10,000 for chairs of Board committees,

•

an annual retainer of $10,000 for members of the Audit Committee, and

•

reimbursement of reasonable expenses incurred in connection with Board-related activities.

Effective January 1, 2008, the Board changed the timing of payment of the director retainer from annually in advance to quarterly in arrears. Quarterly service periods are measured beginning on the date of the annual shareholders meeting and each three months after that date. At the end of each quarterly period each director is paid 25% of the total annual retainer, provided he or she continues to serve as a director as of the payment date.

Our non-employee directors may elect to defer and convert to equity all or part of their annual cash retainer, and to defer receipt of all or part of their annual equity retainer, under our Deferred Compensation Plan for Non-Employee Directors. Under this Plan amounts deferred by non-employee directors are maintained in bookkeeping accounts that are deemed invested in Microsoft common stock, and dividends paid on our common stock are deemed to be invested in our common stock. Accounts in the Plan are distributed in the form of our common stock, with payments

 

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either in installments beginning on separation from Board service or in a lump amount paid no later than the fifth anniversary after separation from Board service.

To align the interests of our directors and shareholders, our Board believes that directors should have a significant financial stake in Microsoft. As provided in section 24 of our Corporate Governance Guidelines, each director should own Microsoft shares equal in value to a minimum of three times the base annual retainer payable to a director. Directors should achieve this ownership level by the later of February 28, 2011 or five years after the director has become a board member. Stock deferred under the Deferred Compensation Plan for Non-Employee Directors counts towards the minimum ownership requirement.

Note concerning 2008 Director Compensation Table:    As described above, in fiscal year 2008 we changed the timing of payment of the director retainer. As a result, each non-employee director received two quarterly payments during fiscal year 2008, amounting to 50% of the total annual retainer. The Director Compensation Table below reflects these two payments. In future years the Director Compensation Table will reflect the full year’s retainer. The overall annual compensation amount for non-employee directors did not change from fiscal year 2007 to 2008.

 

Name		Fees Paid in Cash ($)		Stock Awards ($)(1)		Total ($)
William H. Gates III(2)		0		0		0
James I. Cash, Jr.(3)		50,000		60,000		110,000
Dina Dublon(4)		50,000		60,000		110,000
Raymond V. Gilmartin		45,000		60,000		105,000
Reed Hastings(5)		0		100,000		100,000
David F. Marquardt		40,000		60,000		100,000
Charles H. Noski(6)		0		110,000		110,000
Helmut Panke		40,000		60,000		100,000
Jon A. Shirley		45,000		60,000		105,000

 

(1)

As of June 30, 2008, the non-employee directors had the following aggregate director stock awards outstanding. Stock awards outstanding comprise (1) unvested portions of director stock awards granted in 2004 and 2005 (awards after 2005 vest upon grant), (2) deferred stock awards and cash compensation deferred to stock, and (3) dividend equivalents on deferred stock, which are paid in stock.

 

James I. Cash, Jr.		12,948
Dina Dublon		12,059
Raymond V. Gilmartin		6,905
Reed Hastings		8,550
David F. Marquardt		2,489
Charles H. Noski		21,664
Helmut Panke		2,489
Jon A. Shirley		2,489

 

(2)

In fiscal year 2008 Mr. Gates was an employee director, but is included in this table because he was not a named executive officer. Mr. Ballmer, also an employee director, is excluded because we describe his compensation under “Process for Determining Named Executive Officer Compensation” beginning below on page 13.

(3)

Dr. Cash elected to defer the stock award component of his compensation. The stock award value converted into an aggregate of 2,059 shares of our common stock. This number was calculated by dividing $30,000 by $28.34 and $30,000 by $29.99, which was the closing market price of our common stock on February 12, 2008 and May 12, 2008, respectively. Delivery of the shares will occur in equal installments on the first, second, third, fourth and fifth anniversary of separation from Board service.

(4)

Ms. Dublon elected to defer the stock award component of her compensation. The stock award value converted into an aggregate of 2,059 shares of our common stock. This number was calculated by dividing $30,000 by $28.34 and $30,000 by $29.99, which was the closing market price of our common stock on February 12, 2008 and May 12, 2008, respectively. Delivery of the shares will occur thirty days after the date of separation from Board service.

 

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(5)

Mr. Hastings elected to defer both the cash and stock award components of his compensation. The combined cash and stock award value converted into an aggregate of 3,432 shares of our common stock. This number was calculated by dividing $50,000 by $28.34 and $50,000 by $29.99, which was the closing market price of our common stock on February 12, 2008 and May 12, 2008, respectively. Delivery of the shares will occur thirty days after the date of separation from Board service.

(6)

Mr. Noski elected to defer both the cash and stock award components of his compensation. The combined cash and stock award value converted into an aggregate of 3,775 shares of our common stock. This number was calculated by dividing $55,000 by $28.34 and $55,000 by $29.99, which was the closing market price of our common stock on February 12, 2008 and May 12, 2008, respectively. Delivery of the shares will occur thirty days after the date of separation from Board service.

In addition, to assist directors in developing an in-depth understanding of our business, products, and services, and to facilitate the efficient operation of the Board through the use of computing devices that feature Microsoft software, if requested directors are provided with a personal computer, printer, and associated peripherals for their use while they serve on the Board. Each year, directors also may receive an additional personal computing device and a game or media player device, each with associated peripherals, and Microsoft software and subscription services with an aggregate value of less than $10,000.

Shareholder Communication with Directors

Shareholders may contact an individual director, the lead independent director, the Board as a group, or a specified Board committee or group, including the non-employee directors as a group, by the following means:

 

Mail:		Attn: Board of Directors
		Microsoft Corporation
		One Microsoft Way
		Redmond, WA 98052-6399
Email:		AskBoard@microsoft.com

Each communication should specify the applicable addressee or addressees to be contacted, as well as the general topic of the communication. We will initially receive and process communications before forwarding them to the addressee. We also may refer communications to other departments in Microsoft. We generally will not forward to the directors a communication that is primarily commercial in nature, relates to an improper or irrelevant topic, or requests Microsoft general information.

Concerns about accounting or auditing matters or possible violations of our Standards of Business Conduct should be reported pursuant to the procedures outlined in the Microsoft Standards of Business Conduct, which are available on our Web site at www.microsoft.com/mscorp/legal/buscond.

 

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INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS, AND MANAGEMENT

The following table sets forth, as of September 5, 2008, information about the beneficial ownership of our common stock by all directors, our Chief Executive Officer, Chief Financial Officer and the three other highest paid executive officers (collectively, the “named executive officers”), and our directors and all executive officers as a group.

 

Name		Amount and Nature of Beneficial Ownership of Common Shares as of 9/5/2008(1)			Percent of Class
William H. Gates III		793,130,950	(2)(3)		8.76	%
Steven A. Ballmer		408,252,990			4.51	%
James I. Cash, Jr.		56,399	(4)		*
Dina Dublon		13,925	(5)		*
Raymond V. Gilmartin		61,412	(6)		*
Reed Hastings		187,328	(7)		*
David F. Marquardt		1,554,511	(8)		*
Charles H. Noski		30,821	(9)		*
Helmut Panke		17,880			*
Jon A. Shirley		1,522,284	(10)		*
Christopher P. Liddell		165,657			*
Kevin R. Johnson		1,534,733	(11)		*
Jeffrey S. Raikes		15,363,929	(12)		*
B. Kevin Turner		141,116			*
Executive Officers and Directors as a group (19 persons)		1,235,865,848	(13)		13.61	%

 

*

Less than 1%

(1)

Beneficial ownership represents sole voting and investment power. To our knowledge, Mr. Gates was the only shareholder who beneficially owned more than 5% of the outstanding common shares as of September 5, 2008.

(2)

The business address for Mr. Gates is: Microsoft Corporation, One Microsoft Way, Redmond, Washington 98052-6399.

(3)

Excludes 424,816 shares held by Mr. Gates’ wife, as to which he disclaims beneficial ownership.

(4)

Includes 44,444 options to purchase Company stock exercisable within 60 days of September 5, 2008 (“Vested Options”).

(5)

Includes 11,525 shares representing deferred equity.

(6)

Includes 44,444 Vested Options, and excludes 1,200 shares held by Mr. Gilmartin’s wife, as to which he disclaims beneficial ownership.

(7)

Includes 10,328 shares representing deferred equity.

(8)

Includes 77,777 Vested Options and an aggregate of 1,200 shares held in trusts for three of Mr. Marquardt’s minor children.

(9)

Includes 21,130 shares representing deferred equity.

(10)

Includes 77,777 Vested Options.

(11)

Includes 1,133,334 Vested Options.

(12)

Includes 10,333,332 Vested Options.

(13)

Includes 24,475,196 Vested Options and 42,983 shares representing deferred equity.

 

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NAMED EXECUTIVE OFFICER COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Introduction

This Compensation Discussion and Analysis provides information about the fiscal year 2008 compensation program for the principal executive officer, the principal financial officer, and the three executive officers (other than the principal executive officer and principal financial officer) who were the most highly compensated executives of Microsoft. During fiscal year 2008, these individuals were:

 

•

Steven A. Ballmer, Chief Executive Officer,

•

Christopher P. Liddell, Senior Vice President and Chief Financial Officer,

•

Kevin R. Johnson, President, Platforms and Services Division,

•

Jeffrey S. Raikes, President, Microsoft Business Division, and

•

B. Kevin Turner, Chief Operating Officer.

These executive officers are referred to in this Compensation Discussion and Analysis as our named executive officers for fiscal year 2008.

Compensation Philosophy

We designed the compensation program for our named executive officers to attract, motivate, and retain the key executives who drive Microsoft’s success and industry leadership. We achieve these objectives through a compensation package that:

 

•

provides competitive total compensation consisting primarily of cash and stock,

•

provides a significant portion of total compensation linked to performance that we believe will create shareholder value in the near and long term,

•

differentiates rewards based on the contributions of the named executive officer’s division or group to Microsoft’s performance, and

•

encourages our named executive officers to act as owners with an equity stake in Microsoft.

Process for Determining Named Executive Officer Compensation

The Compensation Committee is responsible for overseeing and approving our executive compensation philosophy and compensation programs, as well as determining and recommending the compensation for our Chief Executive Officer, Mr. Ballmer, to the independent members of the Board of Directors, and determining and approving the compensation for the other named executive officers. At the beginning of each fiscal year, the Compensation Committee reviews and the independent members of the Board approve the performance commitments for Mr. Ballmer. As described in more detail below, the Compensation Committee assesses the performance of Mr. Ballmer and the other named executive officers with respect to the just-completed fiscal year to determine whether any base salary adjustments are warranted, the amount of each named executive officer’s annual cash bonus, and the amount of any restricted stock unit awards.

We compete with global information technology and large market capitalization U.S. companies for senior executive talent. Each year, we review the market competitiveness of our executive compensation program. If the review shows that our executive compensation program is not competitive, we may recommend changes to the Compensation Committee. We may also recommend changes to the compensation program if Microsoft’s business environment or strategic goals warrant a change.

Further, the Compensation Committee periodically reviews the components of our executive compensation program, including any incentive compensation and stock-based compensation plans, to determine whether they are appropriate, properly coordinated, and achieve their intended purposes. From time to time, the Compensation Committee may make modifications or revisions to existing plans and adopt new plans. As described in more detail below, we have adopted a new executive officer incentive plan for fiscal year 2009.

 

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Assessing Performance and Determining Compensation – Chief Executive Officer

At the beginning of each fiscal year, the Compensation Committee recommends to the independent members of the Board of Directors any adjustment to Mr. Ballmer’s base salary and his proposed annual cash bonus for the previous fiscal year. The Compensation Committee, which meets in executive session to determine its recommendations, does not apply a formula to determine any proposed base salary adjustment and annual cash bonus amount. Instead, the Compensation Committee exercises its judgment in formulating its recommendations, taking into consideration the following factors:

 

•

Mr. Ballmer’s historical earnings and his status as a significant Microsoft shareholder,

•

the amounts that are being paid or awarded to the other named executive officers, and

•

the evaluation of Mr. Ballmer’s performance for the just-completed fiscal year conducted by the Governance and Nominating Committee.

The evaluation conducted by the Governance and Nominating Committee assesses Mr. Ballmer’s success in achieving his performance commitments for the just-completed fiscal year, which typically include financial, strategic, and company culture/leadership objectives. The independent members of the Board of Directors assist the Governance and Nominating Committee in the evaluation process. Mr. Ballmer provides the independent members of the Board of Directors with a self-evaluation of his performance. The independent members of the Board of Directors conduct in-depth interviews with Mr. Ballmer’s direct reports and other executives to evaluate his performance. In addition, as part of Microsoft’s annual review processes, all employees have the opportunity to provide written feedback and ratings on the performance of their direct and next level managers. This information from Mr. Ballmer’s direct reports and the other executives is compiled and provided to the Governance and Nominating Committee for consideration as part of its evaluation.

Mr. Ballmer for many years has been a significant shareholder of Microsoft. Because his interests are already closely aligned with shareholders’ interests, the Compensation Committee and Mr. Ballmer have agreed that he should not receive equity compensation. Accordingly, he receives just a base salary and an annual cash bonus opportunity of up to 200% of his base salary. As a result, Mr. Ballmer’s base salary and total compensation have been below competitive levels for the information technology industry and large market capitalization U.S. companies. For fiscal year 2007 (the last period for which such information is available), the average base salary and annual bonus compensation for the CEOs of our peer group companies were $1.4 million and $5.2 million, respectively. During this period, the average total compensation for the CEOs of our peer group companies was $14.6 million. In contrast, Mr. Ballmer’s total compensation for fiscal year 2008 was $1.35 million.

As the principal leader of Microsoft, Mr. Ballmer focuses on building the company’s long-term success, and, as a significant shareholder, his personal wealth is tied directly to sustained increases in Microsoft’s value. While the Compensation Committee believes that Mr. Ballmer is underpaid for his role and performance, it has accepted his recommendation to continue with Microsoft’s historical practice for setting his total compensation opportunity.

Assessing Performance and Determining Compensation – Other Named Executive Officers

Target Compensation.     At the beginning of fiscal year 2008, the Compensation Committee approved the target total direct compensation (consisting of base salary, target annual cash bonus opportunity, and target equity awards) for our named executive officers (with the exception of Mr. Ballmer, whose compensation is determined as described above), based on the following factors:

 

•

the named executive officer’s role and responsibilities,

•

an assessment of compensation practices at our peer group companies for similar positions,

•

internal comparisons of the named executive officer’s total compensation to the total compensation of other executive officers, and

•

the recommendations of its compensation consultant.

 

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Actual Compensation.    Following the end of fiscal year 2008, the Compensation Committee approved base salary adjustments for our named executive officers, as well as the amount of each officer’s annual cash bonus for the just-completed fiscal year, and the amount of his discretionary restricted stock unit awards (called Performance Pool SPSAs) after considering:

 

•

an evaluation of the named executive officer’s performance for the just-completed fiscal year, as prepared and conducted by Mr. Ballmer and supported by performance evaluation documents (including a self-evaluation provided by the named executive officer and written feedback and ratings from his peers, direct reports, and other employees within his division or group),

•

Mr. Ballmer’s recommendations, and

•

other information described below on page 18.

As part of the compensation-setting process following fiscal year 2008, the Compensation Committee also reviewed tally sheets prepared by our Human Resources division that set forth each named executive officer’s historical earnings, the value of his outstanding and unvested equity awards, his current holdings of Microsoft common stock, any perquisites and benefits, and, if applicable, any potential severance payments and benefits.

Annual Compensation-Setting Process

The following table outlines the annual process that is used to assess the performance of the named executive officers and determine their compensation, and identifies the individual(s) or committee of the Board of Directors that is responsible for that action. Except as otherwise noted, these actions typically take place in August and September of each year following our fiscal year end.

 

		For the Chief Executive Officer (“CEO”)		For Other Named Executive Officers
Performance Appraisal conducted by		Governance and Nominating Committee		CEO
Recommendations for Base Salary increases are made by		Compensation Committee		CEO
Base Salary increases are approved by		Independent members of the Board of Directors		Compensation Committee
FY08 Cash Bonus Amounts are recommended by		Compensation Committee		CEO
FY08 Cash Bonus Amounts are approved by		Independent members of the Board of Directors		Compensation Committee
FY08 discretionary SPSA awards from performance pool are recommended by		Not applicable		CEO
FY08 SPSA payments are approved by		Not applicable		Compensation Committee
Timing		Base Salary increases and FY08 Bonus Amounts were approved in September		Base Salary increases, FY08 Bonus Amounts, and FY08 discretionary SPSA awards from performance pool were approved in September

Competitive Positioning

The Compensation Committee targets the total direct compensation (base salary, annual cash bonus opportunity, and equity awards) for our named executive officers (other than Mr. Ballmer) above the median total direct compensation of our peer group companies for similar positions. Even though some of our peer group companies offer sig-

 

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nificant executive perquisites or other special executive benefits programs, we do not. Accordingly, we do not consider the value of such items in our review of their compensation programs.

Our philosophy is to link a significant portion of each named executive officer’s total direct compensation to performance that we believe will create long-term shareholder value and encourage the named executive officers to act as owners with an equity stake in Microsoft. Consistent with this philosophy, for fiscal year 2008, the total cash compensation for the named executive officers was below the median for total cash compensation of our peer group companies for similar positions. A significant portion of the named executive officers’ total compensation (with the exception of Mr. Ballmer) is delivered through awards of restricted stock units with a value tied to individual, corporate, and division or group performance. The Compensation Committee has targeted an above-median position for the overall value of these equity awards. This position helps ensure our ability to attract and retain the senior executive talent required to achieve our business strategies in the competitive environment of the information technology industry, and reflects the fact we do not offer executive perquisites and benefits that are offered by many of our competitors.

When assessing the competitive position of our executive compensation program, as well as making decisions about individual compensation elements, we provide the Compensation Committee with the results of our review of third-party surveys, as well as publicly available executive compensation data, for two specific groups of peer companies:

Technology peer group.    These are companies operating in the information technology industry that focus on producing software or hardware or providing online services, and that employ work forces with skill sets and professional backgrounds similar to those of our work force.

Dow 30 peer group.    Generally, these are large, diversified companies with significant international operations. As an industry and worldwide business leader, we compete for senior executive talent with top companies across a variety of other industries, not just those in the information technology industry.

 

Technology Peer Group				Dow 30 Peer Group*
Accenture   Adobe Systems   Apple   Cisco Systems   Dell Computer   EDS   Google   Hewlett Packard		IBM   Intel   Oracle   SAP   Sun Microsystems   Symantec   Time Warner		3M   Alcoa   American Express   American     International Group   AT&T   Bank of America     Corporation   Boeing   Caterpillar   Chevron Group		Citigroup   Coca-Cola   DuPont   ExxonMobil   General Electric   General Motors   Home Depot   JPMorgan Chase   Johnson and Johnson   McDonald’s		Merck   Pfizer   Procter & Gamble   United Technologies   Verizon   Wal-Mart   Walt Disney

 

*

Hewlett Packard, IBM, and Intel are members of the Dow 30, but are excluded because they are members of the Technology Peer Group. Microsoft is also a Dow 30 member but is excluded from this review.

Compensation Committee Advisors

During fiscal year 2008, the Compensation Committee retained independent compensation consultants to advise it on Microsoft’s executive compensation program and to assist in determining the appropriate base salary levels, annual cash bonuses, and equity awards for the named executive officers by providing industry competitive analyses and assessing the reasonableness of individual compensation elements and total direct compensation.

From January 1, 2008, the Compensation Committee’s advisor has been Dan Marcus, Managing Principal, Semler Brossy Consulting Group, LLC; before January 1, 2008, the advisor was Mike Halloran, Worldwide Partner, Mercer. Both Messrs. Halloran and Marcus:

 

•

consulted with and assisted the Compensation Committee in evaluating management’s recommendations for executive compensation,

•

were present at the Compensation Committee’s regular meetings,

 

16  /  MSFT		2008 PROXY STATEMENT

 

•

met with the Compensation Committee in executive session, where no members of management were present, and

•

consulted from time to time with the Compensation Committee chair outside of its meetings.

Components of Compensation

Through fiscal year 2008, the components of compensation for the named executive officers included base salary, annual cash bonus, equity awards, and certain personal and welfare benefits. As described in more detail below, we have adopted a new executive officer incentive plan for fiscal year 2009.

The following diagram illustrates the total target direct compensation mix for the named executive officers (including Mr. Ballmer, who does not receive any stock-based compensation) for fiscal year 2008 by component (base salary, target annual cash bonus opportunity, and target equity awards).

Base Salary

The base salaries of the named executive officers are reviewed annually by the Compensation Committee to ensure they fairly and competitively compensate these executives for the jobs they perform. In evaluating adjustments to base salaries for fiscal year 2008, the Compensation Committee considered the factors described on page 15 above. In adjusting the base salaries of the named executive officers (other than Mr. Ballmer), the Compensation Committee also considered the recommendations of Mr. Ballmer. The Compensation Committee recommended the adjustment to Mr. Ballmer’s base salary to the independent members of the Board of Directors for their final review and approval.

 

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Annual Cash Bonus

Annual cash bonuses are awarded to the named executive officers for success in achieving corporate and/or division or group business results measured against individual annual performance commitments and to deliver cash as part of each individual’s overall compensation package that is competitive in the marketplace.

In fiscal year 2008, the annual cash bonus opportunities for the named executive officers were based on a percentage of each individual’s base salary. In September 2007, the Compensation Committee approved increases to the target bonus opportunities for each named executive officer for fiscal year 2008 (from 60% to 100% of base salary or, for Mr. Liddell, from 60% to 75% of base salary). The maximum target bonus opportunity for each named executive officer was set at twice his target bonus opportunity. The Compensation Committee determined that these increases were necessary to maintain the total cash compensation of the named executive officers at levels that were appropriately competitive with our peer group companies in the context of the mix of total compensation provided to the named executive officers.

Each named executive officer established his performance commitments for fiscal year 2008 at the beginning of the fiscal year in consultation with Mr. Ballmer. These performance objectives varied for each named executive officer based on his individual responsibilities and the business function or division or group that he manages, and included one or more quantitative and qualitative financial or strategic measures, including:

 

•

revenue,

•

contribution measure,

•

innovation,

•

product development and implementation,

•

quality,

•

customer satisfaction,

•

customer acceptance,

•

developer community satisfaction,

•

organizational culture and leadership,

•

strategic planning and development,

•

operations excellence, and

•

efficiency and productivity.

Mr. Ballmer’s individual performance commitments, which included corporate financial and strategic objectives related to Microsoft’s operating plan for fiscal year 2008, as well as qualitative culture and leadership objectives, were established at the beginning of the fiscal year in consultation with the independent members of the Board of Directors and after review by the Compensation Committee. The performance commitments for our other named executive officers included:

 

•

For Mr. Liddell – improving and streamlining reports and financial processes such as strategy, target setting, and budgeting; delivering on all of the finance function results for Sarbanes-Oxley Act compliance, investment returns, workplace infrastructure, and share buyback programs; and managing and continuously improving investor relations.

•

For Mr. Johnson – the successful integration of the aQuantive acquisition; the financial performance for the Client and the Online Services Business; and driving results on key strategies for digital advertising and online services.

•

For Mr. Raikes – the financial performance for the Microsoft Business Division and the Server and Tools Business; progress on product development; and key product launches.

•

For Mr. Turner – financial performance; growth in emerging markets; driving customer satisfaction; unit volumes; segment and category sales; marketing effectiveness; and increasing productivity.

After the end of fiscal year 2008, the Compensation Committee, in its discretion, approved the bonus amount for each named executive officer (other than Mr. Ballmer) based on recommendations presented to the Committee by Mr. Ballmer. Mr. Ballmer’s recommendations reflected his assessment of each executive’s actual performance as measured against his performance commitments for fiscal year 2008. In evaluating these recommendations and determining each named executive officer’s bonus amount, the Compensation Committee also considered the factors described on page 15.

In the case of Mr. Ballmer, the Compensation Committee recommended his bonus amount to the independent members of the Board of Directors. In making this recommendation, the Compensation Committee considered the

 

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performance evaluation of Mr. Ballmer conducted by the Governance and Nominating Committee, as described on page 14. The independent members of the Board of Directors considered the Compensation Committee’s recommendation, as well as Mr. Ballmer’s performance evaluation, in determining the amount of his bonus.

In September 2008, the Compensation Committee approved (and, in the case of Mr. Ballmer, recommended to the independent members of the Board of Directors) the following fiscal year 2008 bonus amounts for the named executive officers:

 

Name		Fiscal Year 2008 Bonus Targets (% of Base Salary)						Fiscal Year 2008 Bonuses (%)		Fiscal Year 2008 Bonuses ($)
		Minimum (%)		Target (%)		Maximum (%)
Steven A. Ballmer		0		100		200		109		700,000
Christopher P. Liddell		0		75		150		78		420,000
Kevin R. Johnson		0		100		200		97		600,000
Jeffrey S. Raikes		0		100		200		97		600,000
B. Kevin Turner		0		100		200		161		1,000,000

Stock-Based Compensation

We consider stock-based compensation to be a key element of our executive compensation program because:

 

•

equity awards align the interests of the named executive officers with the interests of our shareholders by tying rewards to performance measures and assessments that will contribute to long-term value creation, and

•

retention of the named executive officers is enhanced by having a large percentage of their total compensation derived from equity awards that are subject to multi-year vesting schedules corresponding to our multi-year development and deployment cycles.

Accordingly, a significant portion of the target total direct compensation for the named executive officers (other than Mr. Ballmer) has been delivered under our Shared Performance Stock Awards (“SPSA”) program, a restricted stock unit incentive program rewarding contributions to Microsoft’s long-term performance. The SPSA program has been designed to focus the named executive officers on shared business goals that guide our annual and long-term growth and address specific business challenges by rewarding them with shares of Microsoft common stock based on corporate and individual performance during a specified performance period. Since we began the program in 2003, SPSA awards have represented the single largest component of total compensation for the named executive officers (other than Mr. Ballmer).

The SPSA program consists of two types of restricted stock unit awards: Target Based SPSAs and, for fiscal year 2008, Performance Pool SPSAs. The principal attributes of these awards are as follows:

 

•

Target Based SPSA. Each award is for a target number of shares of Microsoft common stock. At the time of grant, the Compensation Committee establishes one or more performance objectives for a specified performance period, and determines the performance target levels that will result in an award payout ranging from 0-150% of the target number of shares. At the end of the performance period, the target number of shares is multiplied by the applicable payout percentage to determine the actual number of shares to be awarded. The target number of shares subject to a Target Based SPSA award varies among individuals, and the applicable performance objectives are assigned different weights, based on our business priorities.

•

Performance Pool SPSA. Each award is granted from an award pool, the size of which is based on Microsoft’s financial performance during fiscal year 2008. For each named executive officer, the Compensation Committee determined a target award amount, as well as the maximum potential share of the award pool that he was eligible to receive. After the end of fiscal year 2008, the Compensation Committee, in its discretion, determined each named executive officer’s actual award based on its assessment of his performance during fiscal year 2008.

 

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Award Vesting Schedules

SPSAs are subject to a multi-year vesting schedule before receipt by the named executive officers. Prior to vesting, the named executive officers do not have the right to vote or receive dividends on stock underlying SPSAs. SPSAs are subject to forfeiture if a named executive officer’s employment terminates before the end of the performance period for any reason other than death, disability, or retirement. For the SPSAs granted in fiscal year 2008, 25% of the shares earned under the awards are to vest in August or September 2009, with 25% vesting on August 31 of each of the next three years.

Fiscal year 2008 Target Based SPSAs

At the beginning of fiscal year 2008, the named executive officers (other than Mr. Ballmer) were granted Target Based SPSAs with performance objectives tied to operational and financial measures selected from the following three categories:

 

•

Corporate operational performance – measured by the amount of activity generated through Microsoft’s Web sites, and growth in sales of Client (Windows PC operating system) units and Office Suite units relative to growth in the personal computer market.

•

Team financial performance – each named executive officer had different measures of financial performance tied to his function, division, or group, as described on page 21. Financial performance was measured by net revenue and/or contribution margin under Microsoft’s internal accounting policies, which are similar to, but not the same as, net revenue and operating income, respectively, determined under generally accepted accounting principles. Contribution margin measures the contribution to earnings from operations.

•

Team operational performance – each named executive officer had different measures of operational performance tied to his function, division, or group, as described on page 22.

The following table shows the weighting of the performance measures (by category) used to determine the number of shares of Microsoft common stock that each named executive officer was eligible to earn under his fiscal year 2008 Target Based SPSA award.

 

Name		Corporate Operational Performance		Team Financial Performance		Team Operational Performance
Steven A. Ballmer		N/A		N/A		N/A
Christopher P. Liddell		55%		39%		6%
Kevin R. Johnson		55%		36%		9%
Jeffrey S. Raikes		55%		36%		9%
B. Kevin Turner		55%		45%		N/A

The specific performance measures applied to each named executive officer’s Target Based SPSA award varied according to his role and responsibilities and are described below. The Compensation Committee set the performance target levels for the performance measures underlying the Target Based SPSAs with the intention of either sustaining or improving performance as compared with Microsoft’s actual fiscal 2007 results. Overall, the Compensation Committee believed that the performance required to receive an award payout at the low end of the combined opportunity of all targets was attainable, the performance required to receive an award payout at the midrange of the combined opportunity was challenging but achievable and would exceed actual fiscal year 2007 results, and the performance required to receive an award payout at the top of the range of combined opportunity was very difficult to achieve.

Fiscal year 2008 Performance Pool SPSAs

For fiscal year 2008, the Compensation Committee approved an award pool equal to 0.1% of Microsoft’s fiscal year 2008 operating income for the Performance Pool SPSAs, and set a target and maximum potential share of the award pool for each named executive officer (other than Mr. Ballmer). Following the end of fiscal year 2008, the Compensation Committee considered Mr. Ballmer’s recommendation and, in its discretion, determined the amount of

 

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the award for each named executive officer, subject to the individual’s applicable maximum portion of the award pool. The number of shares awarded under each named executive officer’s Performance Pool SPSA was determined by dividing (1) his allocated amount of the award pool by (2) the closing market price of shares of Microsoft common stock on August 29, 2008.

The Compensation Committee’s determinations of the named executive officers’ potential compensation from Target Based SPSAs and target and maximum Performance Pool SPSAs for fiscal year 2008 were based on Mr. Ballmer’s recommendations and its consideration of the factors described on page 14.

Fiscal year 2008 Equity Award Outcomes

In August and September 2008, the Compensation Committee determined the award payouts under the fiscal year 2008 Target Based SPSAs and approved the award payouts under the fiscal year 2008 Performance Pool SPSAs, resulting in the award of the following number of shares of Microsoft common stock to the named executive officers.

 

Name		Actual Target Based SPSA (#)		Range of Possible Target Based SPSAs						Actual Performance Pool SPSAs (#)		Range of Possible Performance Pool SPSAs				Total SPSAs (#)
				Minimum (#)		Target (#)		Maximum (#)				Minimum (#)		Maximum* (#)
Christopher P. Liddell		94,306		0		71,790		107,685		45,805		0		90,660		140,111
Kevin R. Johnson		161,963		0		119,649		179,474		0		0		146,293		161,963
Jeffrey S. Raikes		153,805		0		119,649		179,474		102,602		0		146,293		256,407
B. Kevin Turner		160,439		0		119,649		179,474		95,273		0		146,293		255,712

*

Determined by dividing the fair market value maximum by the closing market price of Microsoft common stock on August 29, 2008.

Target Based SPSAs

The most heavily-weighted performance measure, corporate operational performance, was weighted equally for each named executive officer’s Target Based SPSA award. As noted above, this measure contained two components: the amount of activity generated through Microsoft’s Web sites, and growth in sales of Client (Windows PC operating system) units and Office Suite units relative to growth in the personal computer market. The Compensation Committee determined that, for fiscal year 2008, corporate operational performance results exceeded the 150% maximum performance level.

With respect to the second most heavily-weighted performance measure, team financial performance, each named executive officer had different measures that were tied to his function, division, or group. These measures were based on net revenue and contribution margin, as defined on page 20.

The actual performance for each of these measures is set forth in the table below:

 

Executive Officer		Team Financial Measures		Growth Required for Target Performance			Actual Growth			Performance Level
Kevin R. Johnson		Client and Online Services Business net revenue and contribution margin		9.48	%		9.51	%		116	%
Jeffrey S. Raikes		Microsoft Business Division net revenue; Server and Tools Business and Microsoft Business Division contribution margin		14.53	%		13.27	%		91	%
B. Kevin Turner		Sales, Marketing, Services Group net revenue and contribution margin		52.50	%		54.25	%		115	%
Christopher P. Liddell		Average of all executive officer team financial measures		22.57	%*		22.31	%*		104	%

*

Growth calculations exclude metrics where baseline performance was not relevant. These components resulted in the above-target performance level for Mr. Liddell.

 

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With respect to the final performance measure, team operational performance, Mr. Johnson’s performance measure was based on growth in MSN Portal page views. The Compensation Committee determined that, for fiscal year 2008, his team’s results exceeded the full target performance level but did not reach the maximum performance level (150% of target). Mr. Raikes’ team operational performance measure was based on growth in Windows Server license net deployments relative to server hardware unit shipments. The Compensation Committee determined that, for fiscal year 2008, his team’s results exceeded the maximum performance level. Mr. Liddell’s team operational performance measure was based on an average of the team operational performance for our other executive officers. The Compensation Committee determined that, for fiscal year 2008, these average results exceeded the full target performance level but did not reach the maximum performance level.

Performance Pool SPSAs

After taking into consideration Mr. Ballmer’s assessment of each named executive officer’s performance during fiscal year 2008, the factors described on page 15, and the amount of the Target Based SPSA award, the Compensation Committee, in its discretion, elected to set the actual number of shares of Microsoft common stock awarded under the Performance Pool SPSAs to each named executive officer at the levels shown in the table on page 21.

Mr. Liddell’s Performance Pool SPSA award in combination with his Target Based SPSA award resulted in an overall SPSA Award that was slightly above target. Mr. Ballmer’s recommendation with respect to the Performance Pool SPSA award for Mr. Liddell was based on several factors, including strong performance of our investment portfolio and effective expense planning and control, and effective management of acquisitions with 21 transactions completed, including our largest acquisition to date, aQuantive.

Mr. Johnson did not receive a Performance Pool SPSA award. Because he left Microsoft in early September 2008, the Compensation Committee determined not to grant him a Performance Pool SPSA award.

Mr. Raikes’ Performance Pool SPSA award in combination with his Target Based SPSA award resulted in an overall SPSA award that was above target. Mr. Ballmer’s recommendation with respect to the Performance Pool SPSA award for Mr. Raikes was based on several factors, including successful transition of a new Division President into Microsoft to manage the Business Division. Mr. Raikes vested in 25% of his Performance Pool SPSA award on August 31, 2008; the balance was forfeited following his retirement.

Mr. Turner’s Performance Pool SPSA award in combination with his Target Based SPSA award resulted in an overall SPSA award that was above target. Mr. Ballmer’s recommendation with respect to the Performance Pool SPSA award for Mr. Turner was based on several factors, including strong progress in productivity and business excellence goals relating to expense management and revenue per computer processing unit.

Fiscal year 2009 Executive Officer Incentive Plan

The Compensation Committee has approved a new Executive Officer Incentive Plan (“EOIP”) for our executive officers, which is effective for fiscal year 2009. The EOIP replaces the annual cash bonus opportunity and equity award plans that have been used in previous fiscal years. The Board of Directors believes the EOIP will be a more effective incentive program than the current annual cash bonus and equity award plans for our executive officers because it will:

 

•

allow us to consider performance against a larger number of strategic business imperatives, reflecting Microsoft’s broad and complex business,

•

allow us to reward our executive officers for timely adjustments to changing dynamics in the market for our products and services, including work that cannot be anticipated in advance of the performance period,

•

allow us to incentivize efforts to create shareholder value that may not produce tangible results within a fixed or predictable period of time, and

•

provide for greater opportunity to differentiate rewards among our executive officers.

Like the former equity award program, the EOIP will enable us to continue to deliver a significant portion of compensation to our named executive officers (excluding Mr. Ballmer) through stock, and, in doing so, we believe that (i) the retention of our executive officers will be enhanced by having a large percentage of total compensation derived from EOIP stock awards and by using a multi-year vesting schedule for awards that are earned, and (ii) the plan will better

 

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align management’s interests with our shareholders’ long-term interests through a broad array of strategic business priorities that we believe will contribute to long-term shareholder value and award value that changes with share price.

The EOIP allows the Compensation Committee to establish award programs for specified performance periods. The amount payable to an EOIP participant is stated as a percentage of an incentive pool for a performance period. The maximum amount that may be paid under the EOIP to any participant for performance periods ending during a fiscal year is limited to $20,000,000.

For fiscal year 2009, the Compensation Committee has determined to grant awards to the executive officers as of July 1, 2009 from an incentive pool with maximum funding of 0.35% of Microsoft’s fiscal year 2009 corporate operating income. Each executive officer’s EOIP award will be limited to a fixed percentage of the pool. The Compensation Committee intends that each executive officer (other than Mr. Ballmer) will receive between zero and 150% of a target award specified by the Committee, subject to the availability of pool funding.

Mr. Ballmer’s participation in the fiscal year 2009 incentive pool will be limited to reflect our past practice of not awarding him equity compensation. Thus his maximum award will be the lesser of 200% of his fiscal year 2009 base salary or the maximum pool percentage assigned to him; his target award is 100% of his fiscal year 2009 base salary; and his award will be payable in cash following the end of fiscal year 2009. Following fiscal year 2009, Mr. Ballmer’s award will be recommended by the Compensation Committee based on his performance appraisal by the Governance and Nominating Committee and other information the Compensation Committee deems relevant. The amount of the award will be determined by the independent members of the Board of Directors.

For executive officers other than Mr. Ballmer, following fiscal year 2009 the Compensation Committee will approve EOIP awards in its discretion based on (1) Mr. Ballmer’s recommendations, which will take into account individual performance against annual commitments and any other information Mr. Ballmer finds relevant, and (2) its assessment of the individual performance, corporate performance, and/or relevant group or division performance against annual operating metrics and any other information it deems relevant. Following approval of these EOIP awards, 20% of the EOIP award will be paid to the executive officer in cash and 80% of the EOIP award will be converted into a stock award for shares of Microsoft common stock. The number of shares subject to the stock award will be determined by dividing the value of the 80% of the EOIP award by the closing price of Microsoft common stock on August 31, 2009. This stock award will vest in four equal annual installments, with the first installment vesting following the Compensation Committee’s approval of the EOIP award. Subsequent installments will vest on August 31 of 2010, 2011, and 2012. The conditions for vesting of the stock awards will be the same as under the SPSA program.

Executive Benefits and Perquisites

Microsoft’s named executive officers are eligible for the same level and offering of benefits made available to other employees, including our 401(k) Plan, employee stock purchase plan, health care plan, life insurance plans, and other welfare benefit programs. In addition to the standard benefits offered to all employees, Microsoft maintains a non-qualified deferred compensation plan for senior managers and executives in which the named executive officers may participate. The plan is unfunded, and participation is voluntary. The non-qualified deferred compensation plan allows participants the opportunity to defer base salary, bonus income, and certain cash payments related to the initiation of employment. Microsoft does not contribute to the non-qualified deferred compensation plan.

Perquisites are provided to our named executive officers only in special situations. During fiscal year 2008, we did not provide any significant perquisites to our named executive officers.

Relocation Assistance

Messrs. Liddell and Turner received assistance with relocation expenses that we customarily offer officer hires, including travel, shipping household goods, and temporary housing. As part of the arrangements negotiated to induce Messrs. Liddell and Turner to accept employment offers and reflecting the specific circumstances of their hiring, they also received assistance with the sale of their prior homes. For more information see Note 1 to the All Other Compensation table below on page 26.

Severance and Change in Control Arrangements

Our named executive officers (other than Mr. Turner) are not entitled to any payments upon termination of employment or following a change of control of Microsoft, except that certain stock awards, including stock awards and

 

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SPSAs granted on hire or as part of the annual performance review to employees more than one year before termination of employment, will continue vesting when the recipient retires at the earlier of (a) age 65, or (b) age 55 with 15 years of service. All employees who retire from Microsoft in the United States who meet these retirement criteria (not just executive officers) are eligible for the continuation of vesting. Mr. Turner is entitled to vest in 160,000 shares of his 320,000 share on-hire stock award upon retirement at age 60 or older, and in the case of termination of employment by Microsoft for any reason other than for cause, up to 160,000 shares of his 320,000 share on-hire stock award will vest immediately.

Tax/Accounting Treatment of Compensation

Under Section 162(m) of the Internal Revenue Code, we may not be able to deduct compensation in excess of $1 million paid in one year to certain named executive officers. Certain performance based compensation approved by shareholders is not subject to this deduction limit. Generally, in structuring compensation for the named executive officers, we consider whether a form of compensation will be deductible; however, other factors discussed above may be of greater importance than preserving deductibility for a particular form of compensation. Performance Pool SPSAs and Target Based SPSAs based on corporate and team operational measures are expected to qualify as performance based compensation under Section 162(m). In accordance with SFAS No. 123(R), we measure the fair value of SPSAs based on the market price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. These awards are amortized over their applicable vesting period using the straight-line method.

Other Compensation Policies

Executive Compensation Recovery

Accountability is a fundamental value of Microsoft. We have an executive compensation recovery policy that applies to our executive officers and principal accounting officer. Under this policy, we may recover incentive compensation that was paid based on achieving quantitative performance targets if an executive officer or the principal accounting officer engaged in intentional misconduct that resulted in an increase in his or her incentive compensation. Incentive compensation includes compensation related to annual bonuses and SPSAs.

Stock Ownership and Holding Requirements for Company Executives

The Compensation Committee adopted stock ownership and holding requirements that require each executive officer to maintain a minimum equity stake in Microsoft. The requirements formalize the Compensation Committee’s belief that our executive officers should maintain a material personal financial stake in Microsoft to promote a long-term perspective in managing the enterprise, and to align executive and shareholder interests. The requirements provide for stock ownership and holding as follows:

 

Role		Minimum Ownership		Holding Requirement
Chief Executive Officer and Executive Chairman		10x base pay		Each executive officer must retain 50% of all net shares (post tax) that vest on or after October 1, 2007 until the minimum share ownership requirement is achieved.   If the executive officer is promoted to a position that has a higher ownership requirement, the higher standard will apply and 50% of net vested shares should be retained until the ownership requirement is met.
Division Presidents and Chief Operating Officer		5x base pay
Other Executive Officers		3x base pay

Minimum share ownership levels will be determined annually using the base pay rate as of the end of the fiscal year and the average daily closing share price for the fiscal year. Following the conclusion of each fiscal year, compliance with the requirements will be measured and executive officers will be notified about their ownership require-

 

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ment, current holdings, and whether they must hold additional shares. In general, we believe the ownership requirements are slightly higher than those of our peer group.

For purposes of determining ownership levels, the following forms of equity interests in Microsoft count towards the stock ownership requirement:

 

•

shares held in a 401(k) plan,

•

shares held in trust for the economic benefit of the executive officer, spouse, or dependent children of the executive officer, and

•

shares held outright, whether acquired through open market purchase, the vesting of Stock Awards or SPSAs, stock option exercise, or purchase through our employee stock purchase plan.

At the conclusion of fiscal year 2008, all of our named executive officers complied with these ownership requirements.

SUMMARY COMPENSATION TABLE

The following table contains information about compensation received by the named executive officers for the fiscal years ended June 30, 2008 and June 30, 2007. None of the named executive officers received stock options during fiscal years 2008 and 2007.

 

Name and Principal Position		Year		Salary ($)		Bonus ($)(1)		Stock Awards ($)(2)		All Other Compensation ($)(3)		Total ($)
Steven A. Ballmer Chief Executive Officer; Director		2008		640,833		700,000		N/A		10,001		1,350,834
		2007		620,000		650,000		N/A		9,821		1,279,821
Christopher P. Liddell Senior Vice President; Chief Financial Officer		2008		541,667		420,000		2,515,430		10,185		3,487,282
		2007		520,833		420,000		1,726,575		2,065,854		4,733,262
Kevin R. Johnson President, Platforms & Services Division		2008		620,833		600,000		5,561,367		9,713		6,791,913
		2007		600,000		600,000		4,684,671		1,141,855		7,026,526
Jeffrey S. Raikes President, Microsoft Business Division		2008		620,833		600,000		6,414,572		8,308		7,643,713
		2007		600,000		600,000		4,974,405		8,162		6,182,567
B. Kevin Turner Chief Operating Officer		2008		620,833		1,000,000		8,411,234		9,628		10,041,695
		2007		595,000		715,000		6,870,236		270,514		8,450,750

 

(1)

The amounts disclosed in the Bonus column were awarded under Microsoft’s Annual Performance Bonus Plan for Executive Officers.

(2)

The amounts in this column are calculated using the same valuation methodology we use for financial reporting purposes in accordance with SFAS No. 123(R). The impact of estimated forfeitures related to service-based vesting is not included in this calculation, in accordance with SEC rules. As a result, these amounts do not reflect the amount of compensation actually received by the named executive officer during the fiscal year. For a description of the assumptions used in calculating the fair value of equity awards under SFAS No. 123(R), see Note 18 of our financial statements in our Form 10-K for the year ended June 30, 2008 and Note 14 of our financial statements in our Form 10-K for the year ended June 30, 2007.

(3)

See the All Other Compensation table below for a breakdown of these amounts, which include:

•

matching Company contributions under our 401(k) plan,

•

the value of cash and benefits and imputed income received under our broad-based flexible benefits program,

•

payments under our option transfer program, and

•

other perquisites including home relocation assistance.

 

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ALL OTHER COMPENSATION

 

Name		Year		Relocation Expense ($)(1)		Tax Gross-ups ($)(2)		401(k) Company Match ($)		Imputed Income Received under Broad-based Benefits Program ($)(3)		Other ($)(4)		Total ($)
Steven A. Ballmer		2008 2007		– –		– –		6,900 6,750		3,101 3,071		– –		10,001 9,821
Christopher P. Liddell		2008 2007		71 2,025,757		– 30,379		6,900 6,750		3,214 2,968		– –		10,185 2,065,854
Kevin R. Johnson		2008 2007		– –		– –		6,900 6,750		2,813 2,783		– 1,132,322		9,713 1,141,855
Jeffrey S. Raikes		2008 2007		– –		– –		6,900 6,750		1,408 1,412		– –		8,308 8,162
B. Kevin Turner		2008 2007		– 253,884		– 7,422		6,900 6,750		2,728 2,458		– –		9,628 270,514

 

(1)

As part of our executive relocation program, in order to allow Messrs. Liddell and Turner to use the equity in their former homes to purchase new homes in the Redmond area after they were hired, we agreed to purchase their former homes at a price equal to the average of three independent appraisals because they were unable to sell the homes within a mutually agreed time. We then resold these homes at our expense. SEC rules require that we include as compensation to Messrs. Liddell and Turner all expenses we incurred in fiscal year 2007 and fiscal year 2008 in connection with the sale of these homes, including any difference between the price at which we purchased the homes based on appraised value and the price at which we sold them.

(2)

Tax reimbursements related to relocation assistance received by Messrs. Liddell and Turner.

(3)

These amounts include imputed income from life insurance, imputed income from disability insurance, imputed income from athletic club membership, and payments in lieu of athletic club membership. These benefits are available to all of our U.S.-based employees.

(4)

Mr. Johnson participated in our stock option transfer program that was completed in December 2003. He transferred 2,404,000 stock options in the program. He received one-third of the total payment for the transferred options in fiscal year 2004, the second one-third installment (plus interest) in fiscal year 2006, and the final one-third installment (plus interest) in fiscal year 2007.

GRANTS OF PLAN-BASED AWARDS

FOR FISCAL YEAR ENDED

JUNE 30, 2008

 

Name		Grant Date		Estimated Possible Payouts Under Equity Incentive Plan Awards(1)						Grant Date Fair Value of Stock Awards ($)(2)
				Target Based SPSA
				Threshold (#)		Target (#)		Maximum (#)
Steven A. Ballmer		N/A		N/A		N/A		N/A		N/A
Christopher P. Liddell		9/12/2007		0		71,790		107,685		2,008,684
Kevin R. Johnson		9/12/2007		0		119,649		179,474		3,347,779
Jeffrey S. Raikes		9/12/2007		0		119,649		179,474		3,347,779
B. Kevin Turner		9/12/2007		0		119,649		179,474		3,347,779

 

(1)

All fiscal year 2008 equity grants to named executive officers were made under the 2008 SPSA program. As described in greater detail in the Compensation Discussion and Analysis beginning on page 13, the threshold amount represents the minimum payout under the plan. The target amount reflects a payout at the 100% of target performance level. The maximum amount represents a payout at the 150% of target maximum performance level. The table does not include the Performance Pool SPSAs granted following fiscal year 2008 shown on page 21.

 

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(2)

We measure the grant date fair value of SPSAs based on the market price as of the date of grant of common stock underlying a target award, reduced by the present value of estimated future dividends because the awards are not entitled to receive dividends prior to vesting. These awards are amortized over their applicable vesting period using the straight-line method.

The following table provides information on exercisable and unexercisable options and unvested stock awards held by the named executive officers on June 30, 2008.

OUTSTANDING EQUITY AWARDS

AT FISCAL YEAR END

JUNE 30, 2008

 

Name		OPTION AWARDS											STOCK AWARDS
		Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date					Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)(6)
Steven A. Ballmer		N/A		N/A		N/A		N/A					N/A			N/A
Christopher P. Liddell		0		0		0		0					49,378	(5)		1,358,389
													34,688	(7)		954,267
Kevin R. Johnson		466,667		0		25.1438		2/20/2011	(1)				234,420	(5)		6,448,894
		666,667		0		21.5910		7/31/2012	(2)				43,875	(7)		1,207,001
Jeffrey S. Raikes		4,444,444		0		40.7813		3/6/2010	(1)				291,778	(5)		8,026,813
		2,222,222		0		29.9813		4/24/2010	(2)				99,938	(7)		2,749,294
		2,222,222		0		25.1438		2/20/2011	(3)
		1,444,444		0		21.5910		7/31/2012	(4)
B. Kevin Turner		0		0		0		0					320,000	(8)		8,803,200
													210,080	(5)		5,779,301
													99,938	(7)		2,749,294

 

(1)

The option was granted ten years prior to the option expiration date. The option vested and became exercisable in equal six-month installments. The option fully vested on February 20, 2006.

(2)

The option was granted ten years prior to the option expiration date. The option vested and becomes exercisable in equal six-month installments. The option fully vested on July 31, 2007.

(3)

The option was granted ten years prior to the option expiration date. The option vested and became exercisable in equal six-month installments. The option fully vested on March 6, 2005.

(4)

The option was granted ten years prior to the option expiration date. The option vested and became exercisable in equal six-month installments. The option fully vested on April 24, 2005.

(5)

A Target Based SPSA was granted to Messrs. Johnson and Raikes on August 29, 2003, for the fiscal 2004-2006 performance period ended June 30, 2006, and to Messrs. Turner and Liddell on their dates of hire of September 8, 2005, and May 9, 2005, respectively. The actual number of 2004-2006 performance period shares was determined by the Compensation Committee after the end of the performance period. The unvested shares vest on August 31, 2008, subject to continuous employment.

(6)

The market value was calculated by multiplying the number of shares shown in the table by $27.51, which was the closing market price on June 30, 2008, the last trading day of our fiscal year.

(7)

A Target Based SPSA was granted on September 13, 2006, for the fiscal year performance period ended June 30, 2007. The actual number of 2007 performance period shares was determined by the Compensation Committee after the end of the performance period. The unvested shares will vest in three equal installments on August 31, 2008, August 31, 2009, and August 31, 2010, subject to continuous employment.

(8)

To replace equity compensation Mr. Turner forfeited upon leaving his previous employer, Mr. Turner received a stock award for 320,000 shares of Microsoft common stock, of which 25% vested on September 1, 2008, 25% will vest on September 1, 2010, and 50% will vest upon retirement from Microsoft at age 60 or older.

 

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The following table provides information, on an aggregate basis, about stock options that were exercised and stock awards that vested during the fiscal year ended June 30, 2008 for each of the named executive officers.

OPTION EXERCISES AND STOCK VESTED

FOR FISCAL YEAR ENDED

JUNE 30, 2008

 

		OPTION AWARDS				STOCK AWARDS
Name		Number of Shares Acquired on Exercise (#)		Value Realized on Exercise ($)		Number of Shares Acquired on Vesting (#)			Value Realized on Vesting ($)
Steven A. Ballmer		N/A		N/A		N/A			N/A
Christopher P. Liddell		0		0		16,667 60,940	(1) (2)		489,843 1,750,806	(1) (2)
Kevin R. Johnson		0		0		3,023 249,045	(3) (4)		87,637 7,155,063	(3) (4)
Jeffrey S. Raikes		0		0		3,556 325,090	(3) (5)		103,088 9,339,836	(3) (5)
B. Kevin Turner		0		0		243,392	(6)		6,992,652	(6)

 

(1)

The shares vested on May 9, 2008. The value realized was calculated by multiplying the number of shares shown in the table by $29.39, which was the closing market price on May 9, 2008.

(2)

Includes 49,378 shares under a stock award granted on May 9, 2005 and 11,562 shares under a stock award granted on September 13, 2006. The shares vested on August 31, 2007. The value realized was calculated by multiplying the number of shares shown in the table by $28.73, which was the closing market price on August 31, 2007.

(3)

The shares vested on July 31, 2007. The value realized was calculated by multiplying the number of shares shown in the table by $28.99, which was the closing market price on July 31, 2007.

(4)

Includes 234,420 shares under a stock award granted on August 29, 2003 and 14,625 shares under a stock award granted on September 13, 2006. The shares vested on August 31, 2007. The value realized was calculated by multiplying the number of shares shown in the table by $28.73, which was the closing market price on August 31, 2007.

(5)

Includes 291,778 shares under a stock award granted on August 29, 2003 and 33,312 shares under a stock award granted on September 13, 2006. The shares vested on August 31, 2007. The value realized was calculated by multiplying the number of shares shown in the table by $28.73, which was the closing market price on August 31, 2007.

(6)

Includes 210,080 shares under a stock award granted on September 8, 2005 and 33,312 shares under a stock award granted on September 13, 2006. The shares vested on August 31, 2007. The value realized was calculated by multiplying the number of shares shown in the table by $28.73, which was the closing market price on August 31, 2007.