Proxy Adviser ISS Recommends Rejection of Microsoft CEO Pay Package

By Don Clark and Joann S. Lublin 

An influential adviser to institutional investors is recommending shareholders vote against the pay package for new Microsoft Corp. Chief Executive Satya Nadella in a nonbinding vote at the software company's annual meeting in early December.

Institutional Shareholder Services criticized what it called a "mega" grant of restricted stock to Mr. Nadella, which ISS valued at $65 million.

None of the shares vest until 2019; some don't vest until 2021. The number of shares Mr. Nadella ultimately receives will depend on Microsoft's shareholder return over the next seven years.

But ISS said the conditions would allow Mr. Nadella to sell one-fourth of the shares even if Microsoft underperforms other big companies through the vesting period.

The advisory firm also found it "concerning" that Microsoft plans to grant Mr. Nadella additional shares annually. The CEO received the first of those, a $13.6 million restricted-stock award, in August, which was early in Microsoft's 2015 fiscal year.

Mr. Nadella also had received a "special retention stock award" valued at $13.5 million in August 2013, before he was named CEO. Including that award, ISS estimated Mr. Nadella's compensation for the fiscal year ended June 30 at $90.8 million.

Mr. Nadella was named CEO in February, succeeding Steve Ballmer as Microsoft planned to acquire Nokia Corp.'s handset business. ISS noted that, unlike Mr. Ballmer and his predecessor Bill Gates, Mr. Nadella wasn't a big Microsoft shareholder.

"Even in consideration of these challenges," ISS wrote, "significant concerns are raised by Nadella's new compensation package."

A Microsoft spokesman referred to a letter to shareholders from Chairman John Thompson explaining the rationale for Mr. Nadella's compensation package. He wrote that the long-term equity grant "motivates our CEO to create sustainable long term shareholder value by providing him with the opportunity to share in those gains and build ownership in the company over the next seven years."

It is unusual for ISS, the biggest U.S. proxy adviser, to recommend shareholders vote against a company's executive pay practices, which are held in nonbinding "say on pay" elections at annual meetings. Through Nov. 1, the firm this year has urged that its clients vote against pay packages at 12.6% of companies in the Russell 3000 Index, an ISS spokesman said Tuesday. Such advisory votes are required by the Dodd-Frank financial overhaul law.

Glass, Lewis & Co., another big proxy adviser, urged shareholders to support Microsoft's executive-compensation plan.

Write to Don Clark at [e-mail] and Joann S. Lublin at [e-mail]

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