With workers leaving Redmond in search of hot new startups, the company needs to minimize disruptions that could impact customers.
Microsoft said it plans to raise compensation levels for employees across the board in an effort to attract and retain top IT pros, who increasingly are being siphoned off by competitors like Apple, Facebook, and others that can offer lucrative stock options or the chance to work on buzzworthy products.
For CIOs with millions of dollars invested in Microsoft technology, it's a development worth watching, analysts say.
Microsoft's compensation changes were leaked to the Internet. "In the same way we continuously improve our products and services, we must also improve the ways we support and reward our talented people," said Microsoft CEO Steve Ballmer, in a memo to employees Thursday that quickly made its way on to the Web.
"In line with that, today we are announcing changes that will benefit our employees by sharpening the clarity of our performance review process and increasing compensation. These changes represent the most significant investment in overall compensation we have ever made," said Ballmer.
Ballmer said mid-level employees, particularly those who work in research and development, would be in line for the biggest increases, which take effect in September. A new 1-to-5 employee review system will tie compensation to performance more directly. Additionally, all employees who are eligible for stock awards will see a portion of that compensation shifted to their base salaries.
"The changes we're rolling out today will help ensure Microsoft continues to be the place that top talent comes to change the world," said Ballmer.
The move comes as Microsoft finds itself struggling to retain its best and brightest. The list of executives who have departed the company in just the past two years includes former Business Division president Stephen Elop, former Windows strategy VP Mike Nash, former Entertainment & Devices president Robbie Bach, former Genuine Software program director Alex Kochis, former Windows group senior VP Bill Veghte, and chief software architect Ray Ozzie.
Global ad chief Carolyn Everson, who was personally recruited by Ballmer, bolted for Facebook in February after less than nine months on the job. That Microsoft is increasing compensation across the board is a sign that there is a similarly troubling attrition rate in the rank and file.
Microsoft used to be able to lure top programmers and project managers with the promise stock options that turned college grads into millionaires. But the company's shares have flatlined, gaining little in value over the past decade.
Over the same period, rival Apple has seen its share price realize triple-digit gains. Meanwhile, Facebook, Foursquare, and other companies in hot new areas like social networking and mobile apps are granting employees shares that could make them rich overnight if and when they go public.
Tech consultant Rob Enderle, principal analyst at the Enderle Group, said the upshot is that Microsoft is experiencing "a massive brain drain" and that the most accomplished developers are thumbing their noses at enterprise projects for the chance to work on popular consumer products and services.
His advice to IT project managers that rely on a particular group of developers or service workers at Microsoft or any other vendor? "It's probably a good idea to let the company know that you're dependent on these people and you're not going to be happy at all if they depart. That puts money in the pool to retain them," said Enderle.
It's an issue that more and more CIOs and IT managers may have to face, and it doesn't just concern Microsoft.
"Regardless of the companies we're talking about, there's a lot of movement right now because you have a lot of younger firms coming up and workers think, 'If I really want to retire in ten years maybe I need to take a chance,'" said Enderle.
Shares of Microsoft were off about 1%, to $25.52, in Thursday trading.
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