July 21, 2005

Carrots and Sticks; MSFT at 26

Continuing and expanding yesterday's article on Microsoft departures and lawsuits.

The best way of retaining an employee is to make them happy!

But as a "mature" Dow Jones Industrial, Microsoft needs to milk a massive ongoing income stream. It means bean-counting is a priority, and that means the company has been cutting out many of the joys in life, from benefits to "company store discounts" to free cans of Mr. Pibb.

Worse, the company has lost a whole generation of inspirational leaders. Microsoft has become a company full of old-line managers and only scattered groups of junior creative people. As a whole the company finds it hard to differentiate "innovation" from "risk" and "wastefulness".

The company is just not such a fun place anymore. It grows more bureaucratic and slow and political every year. So talented people are leaving.

There are a couple ways to retain an employee, even if they are not particularly happy. One way is to promise to make them rich if they stay....

Dangling Carrots and MSFT at 26

If you pay your employees with stock options, a rising stock price will eventually make them rich. But promising riches is a tricky thing.

A sky-high stock buys the financial freedom that lets people leave when they want to, without risk. If folks are not happy, but they are rich, then they will leave. So Mark Anders, another ex-Microsoft friend of mine, wondered privately to me about the possibility that, post-2001, Microsoft might have been purposely managing their stock price to keep it down and steady around 26.

You see, there is a huge raft of employee-owned stock options that were granted to retain special "Partners" during the employee hemorrage around 2000. A big chunk of these options have strike price just above 26, and so if the stock price went to, say, 40, a large fraction of the company - and many of the best people with the largest stock awards - the "Partners" - would have the kind of financial freedom that they had back during the 2000 bubble. With the money, they would likely find no reason to stay.

But, Mark points out, an exodus of rich employees would not be in the company's interest, so as the CFO's office decides how to manage MSFT stock buybacks and dividends and quarterly balance sheets and investor guidance, they are unlikely to ever let another dramatic stock rise happen. It happened before. And last time around it was just too damaging.

The promise of getting rich is the trick to retention, not actually getting rich.

Maybe MSFT 26 is Just Natural

I have two less Machiavellian theories about the steady MSFT stock price at 26. One is that the huge raft of "Partner" employee stock options simply acts to naturally keep the stock price below that level through the laws of supply and demand. Poke above the strike price, and enough employees will exercise their options to sell to push the price back down.

The second theory is that investors are aware of this situation. As a large investor you have surely witnessed the damaging employee exodus in 2000, and you realize that at 40 dollars, the company would be worth less than at 26 due to the employee exodus that would be caused by a stock price above 26. So you would never bid 40 for the stock; that would be betting against yourself.

You would rather see the company issuing dividends and using other techniques to distribute value to shareholders while keeping today's stock price down. There are probably many people at Microsoft wondering if they will ever get their stock option payday. If large investors are sophisticated enough about the link of stock price to employee retention, it is unlikely to ever happen.

The Stick

There is a third way to way to keep employees. It is a pretty old-fashioned technique. That is to threaten people with some kind of terrible punishment if they leave.

Microsoft has shown that it knows how to wield the stick: the trick is to make it crack very loudly. You can't keep the employee who has already decided to leave, but if you slap them on their tail and the the stick cracks loudly enough, you can plant the seeds of fear and uncertainty into the minds of those who secretly wish to leave.

Thus we have very loud announcements of lawsuits against Crossgain back in 2001 and the extremely loud pronouncement of lawsuits against Kai-Fu Lee and Google today. For the record, I somehow survived the 2001 Crossgain threatened-lawsuits intact and happy, with bank account, family, and all. Despite all the defensive measures we took at Crossgain, I do not believe that I ever faced any real legal peril after leaving Microsoft. Instead, after leaving Microsoft I have contributed to a fascinating series of projects at Crossgain, BEA, Apache, on my own, and at now at Google. Life has never been better.

But then again, I do not think that the threatened legal action was ever really meant for us. It was all meant for the spectators.

Rage, Fury, and Ask Before You Stand Up

Kai Fu leaves and Microsoft is "incandescent with rage" - this is some of the language that is being leaked to the press today. Spreading fear of retribution - angry retribution, with shouting and everything - is the technique. "Where do you want to go today!" Microsoft seems to ask that question rhetorically today, stick in hand, with a threatening tone.

Again, the promise of retribution is what it is all about, not the actual retribution itself. Once they sue you, there is no way you are going to stay at Microsoft.

Instead, the message is crafted to scare current employees into inaction. For example, a New York Times article that has been repeated in all sorts of other outlets parrots a message from Microsoft: "Tom Burt, deputy general counsel at Microsoft, said the company often reached agreements with former employees that let them work for a competitor in a position that did not overlap directly with their former responsibilities."

This last assertion is the most ridiculous thing about the whole piece of news coverage. Often? I have never heard of anybody negotiating with their old employer for permission to go off and do the Next Great Thing. It is none of their business!

Once you decide to leave a company, you do not need to negotiate with your old company's Deputy General Counsel about your departure. You just pick up and leave. Previous agreements you may have signed is one thing. Leave it to lawyers to decide what kinds of agreements are legal and which are not.

But when you leave you absolutely do not need to walk into Tom Burt's office and tell him all about your plans or sign a second piece of paper. You do not need to ask Tom Burt's permission to do anything. That is ludicrous. You are leaving! You are not a slave.

The lawsuit, and all the press around it, is designed as a message to frighten current Microsoft employees and glue them into their ergonomic Steelcase office chairs. It is a penal colony tactic.

I enjoyed my years at Microsoft. It really was a terrific place to be a software engineer. It was a great place to learn and practice the art - far better than many outsiders give it credit for. But I am saddened today. I find it unfortunate that this is where Microsoft has come today.

The Shell Game

Maybe somewhere there are some corporate lessons to be learned. I am not sure how Microsoft could have managed things better; but it is an interesting story of how a rising stock can be a double-edged sword. The whole bubble was a fascinating piece of history. Ah well. Enough dwelling on the past!

I think there are personal lessons that are more valuable. After all these years, it is pretty clear to me that it is important to pay attention to your work more than how you are compensated. There are plenty of interesting things to do in the world. New trails to blaze, new mountains to climb.

And be sure you catch yourself if you are watching the stock too closely. Or the lawsuits. They are a sign that you are being manipulated, and that you have your eye on the wrong shell. Happiness lies under the other shell. Make sure you come home fulfilled at the end of the work day. Do not fear change. Make sure you chase the dream.

Posted by David at July 21, 2005 06:16 AM

Very intresting read, and new insight on the company , it's managment, and it's stock (this and your other articles), keep it on :)

I see you work on google, I wonder how freely you can speak on google vs microsoft... (previous attempts didnt go on that good), but still it would be nice to hear you comment on this...

Posted by: Tom Z at July 29, 2005 05:24 PM
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