Keyword: Microsoft

There is a great article in the Wall Street Journal today [Note: I believe this link is subscription-only].

The title of the article says it all: “When $70 Million is Not Enough”.  It is about how a star at Goldman Sachs, aptly named Mark McGoldrick (nicknamed “Goldfinger”), quit because he felt his $70 Million in compensation in 2006 was inadequate.

I’m quite sure that the vast majority of the world is just flabbergasted by the hubris of Mr. McGoldrick.  I’m sure the indignation is quite ripe.  After all, even the biggest lottery winners don’t even dream of getting this much money over their lifetime, let alone as one year’s compensation.  And they marvel at the fact that the island of Saint Kitts is overwhelmed by the damage done yesterday by Hurricane Dean, estimated to be over $50 Million — an amount Mr. McGoldrick could cover and still have tens of millions to spare.

But I’m not surprised.  Because I’ve seen worse.

Yes, really, I’ve seen worse.  You see, I was in charge of compensation at Microsoft at the zenith of the dot-com boom.  If you want to get a brain freeze, if you want to see warped values, and if you want to see upset people, you need to see extremely competitive people discuss their compensation.

I had senior people in my office griping about net worths in the magnitude of the GDPs of small countries.  They pointed to others who they deemed less worthy, and complained that just being ahead of them was not enough.  No, they needed to wipe the floors with them.

I had more than one executive who was on their way out the door demand, and get, millions in compensation — for what I was not sure.  They stomped and moaned and complained like children until someone, anyone, would grant them what they wanted.  And then they left.

I had one case where an executive threatened to start up a business that potentially would cause one small part of the company some grief.  He made numerous vague, disguised threats until he was granted $30 Million in stock options.  He promptly left, and started the business anyway.  And now his biggest customer is Microsoft.

So, Mr. McGoldrick is disgusting, and clearly demonstrates that all that is wrong with Wall Street today.  But he’s just an amateur.  If he wants to really know how it’s done, perhaps he should drop me a line.

Once in a while, as a manager, you will be fortunate enough to have a team member who is a superstar.  These people are not just above average, they are vastly better.  They are smarter, more driven, highly focused, and they get far more work done than the rest.  It often seems like they are just coasting through it, but miraculously they achieve well beyond the others.

If you are fortunate enough to have a superstar working for you, it usually comes with both benefits and curses.  Certainly it can be a joy to have someone you can count on to excel every time you give them as task.  As a manager, you dream about having the kind of team members who will just take what you give them, and exceed your wildest dreams every time.  Get more than one of these people and you think you’ve died and gone to manager’s heaven.

That is, until it comes time to work as a team.  There’s something about superstars that makes them innately incapable of “playing well with the other children”.  Perhaps it’s their low tolerance for busywork, structure, and stupidity.  It may be that they know they are superior.  Maybe it’s their habit of picking and eating their ear wax…  Whatever it is, it certainly is common for superstars to be a royal pain when you try to get them to work in a group.

I’ve seen dozens of superstars.  Microsoft seemed to attract, select for, groom, and coddle them.  I worked with some of the brightest minds in the world at Microsoft, and many people who I would consider well worth the title of superstar.  I have managed more than my fair share of them.  And I have the battle scars to prove it.

I made the mistake at one point of promoting one of the brightest minds at the company to be a team leader for me.  One of the few pure geniuses I’ve ever encountered, his Ivy League degrees, Rhodes scholarship, and meteoric rise at the company couldn’t rescue his team from his short temper, low tolerance for mistakes, and his blatant misogyny.

On his watch, a team I’d carefully recruited and nurtured for months was disintegrating before my eyes.  After numerous angry departures, threats of legal action, and failed attempts to counsel him and get the team back on track I removed him from a leadership position.  And since I believe strongly in helping my fellow managers, I added “this person should never be allowed to manage people” to his performance review.  He was recently mentioned in a prominent business publication as a likely future CEO of the company…

But, I digress.  In this case, clearly the pain of a superstar wasn’t worth it.  It was really my fault, I should have far more carefully considered his management skills before I promoted him out to a role that he wasn’t suited for.  The larger question is: is it ever worth it to have superstars on the team?

The short answer is, yes, superstars are worth the pain.  But only if they are in a role that suits them, and only if you can find a way to control their impact on the rest of the team.

The issues with the rest of the team are many.  Very often people resent working with superstars.  Even if the manager is careful to not show favoritism, people often perceive a bias in the superstar’s direction.  How, after all, could they be doing so well, getting so much done, and attracting so much attention?  They can’t stand watching someone else finish the task in half the time, and I don’t blame them.

But more often than not, superstars do get recognition and attention from management.  And that just rubs some people the wrong way.  Especially when it seems like their gift is not learned or earned, just that — a gift.

And if you put superstars in charge, more often than not they get frustrated, with the less competent members of the team, with the progress of the project, and especially with the bureaucracy — the processes and procedures inherent to management.  It ends up being a nightmare for everyone, the team, you the manager, and even the superstar themselves.

So how do you take advantage of the seemingly infinite resource that a superstar can provide?  Simple: put them in their sweet spot, their area of excellence, and do whatever it takes to make them successful.  Usually that means giving them what they need and staying out of their way.  And regular and earnest praise helps as well.

Superstars are worth the effort.  But you have to recognize what they are good at, and let them wow you at it.  Don’t mistake excellence in on thing as excellence in everything.  This helps to avoid the Peter Principle and saves everyone’s sanity.

In the world of Frequently Asked Questions (FAQ) to me, one of the most frequent is “how do I get a job at Microsoft?”.  If I had a dime for every time I’ve been asked it, at parties, on the street, and especially when I post comments on the internet, I’d have…  probably a couple of hundred dollars.

Microsoft is not that much different than most large companies with respect to getting in the door.  The keys remain the same: apply for a specific job not just “any job”, work to make yourself stand out (in professional ways), and, if possible, leverage any kind of personal connection you can make.

The things that make MS different are things that only make these more important — they have thousands of hiring managers, many thousands of open positions, and tens of thousands of applicants.

At Microsoft, the crush of tens of thousands of applicants a month meant that we resorted to “data management” to get the pile under control.  If you simply add your name to this pile, your odds of getting lost increase exponentially.  So, just like at other companies, the need to become an individual, not just a résumé, is paramount.

So what does that mean?  Sure, you can submit your résumé through the web.  In fact, you should do that.  But don’t expect this “shot in the dark” to work.  Your résumé will be scanned into a huge database, searched for keywords, and maybe, just maybe, will get pulled up by the recruiter trying to fill the job for a hiring manager as a potential candidate.  But the odds are, literally, 10,000 to 1 of that happening.

It means you need a great résumé, and I’m sure you’ve worked on yours.  I’m working on a post that will help with that.  I’ll update this link when I get it completed.  A great résumé helps you get it out of the pile and onto the short list.

It also means you really should decide exactly what you want to do, or at most a couple of jobs that are what you want to do.  Search the career site, and narrow your application to just a couple.  Huge “anything you’ll take me for” kinds of applications are just ignored.  You clearly don’t have any meaningful goals, you just want in.  That’s not interesting.  So research heavily what the jobs are, and what you want to do.

Be realistic, don’t apply for a higher position than one for which you can be an obvious candidate.  You want to be a clear consideration, not a stretch and not “overqualified”.  So apply perhaps just a tad low.  There are a million jobs at the company, people move around all the time, so just get started in a job you can be great at, then move on to your dream job from there.

But, the best way in is with some recommendation, or at least some contact with someone in the company.  Résumés that come in from someone in the company (even if just with a note that says “I don’t really know this person, but…”) come in the system through a different pipe and have a better chance of spending 10 seconds on the desk of someone who can move it on to a short list.  Coming in through the normal channels just gets it into the massive pile with everyone else.

This means you should leverage any contacts you have.  And before you ask, I’m sorry to tell you that I don’t have any direct contacts any more.  At one point I was a super contact.  As VP of HR, I could virtually guarantee that someone who cared would look at your résumé.  But that time has long passed.

So, if you know anyone (and I mean anyone) who works at the company, buy them a drink, ask them about working there, and ask them if you can send them your résumé for them to forward on to their HR person, and maybe a manager they might know who would be hiring.  Most people will do it, and most people provide just enough added emphasis to get your résumé read.

I can guess that your best friend doesn’t work there, or you wouldn’t be asking me for help.  But, I’m sure you know people indirectly.  You’ve met people at parties, or someone lives down the hall in your apartment complex, or you have a friend who knows someone.

Life is a network, leverage it.  Get an introduction, strike up a conversation, and enlist their help.  If you are kind, earnest, and sincere, it’s almost impossible to people to resist helping you.

If you really don’t know anyone, fix that.  Find out where people go have lunch or go after work, and find a way to introduce yourself.  Look for the telltale employee badge and find some way to strike up a conversation.

“What’s it like to work there?” “How long have you been there, do you like it?” “Wow, it’s always been my dream to work there, how do I get in?”  Just listen, and be interested.  Everyone is human and likes to be listened to, and even though you may strike out, eventually someone will be a friend and will help you get past the door.

Don’t paper the place with your résumé.  Don’t send in hundreds, don’t ask everyone you’ve ever met to send in one, and don’t play games (like “cute” or “trick” résumés).  They will notice.  And will immediately put you on the (informal) black list.  It’s not a game, don’t treat it like one.

Once you do get a call from a recruiter, make sure you hit the ball out of the park.  You are likely to only get only one shot at it.  The recruiter is doing a phone screen and will get a feel for who you are from that phone call.

While they are probably calling about one specific job, they have more power than that.  If you are interesting, and someone worth following up on, they will consider you for other openings they are working on, or even pass your resume on to a colleague.  In any case, really work on making that phone call the best you can make it.

If you do get called in for an interview, be prepared for a really lousy experience.  Interviews are never fun, and for some reason Microsoft seems to delight in beating people up.

There are books about it (one example is: “How would you move Mount Fuji”), and lots of anecdotes on the internet.  It all should be taken with a grain of salt, but like most things they are based in some fact.  In any case, the results are a day that is not a joy, but can be worth the pain.

Whatever you do, don’t exaggerate your experience or your skill set.  They will check up on it, and during the interview, they will test you on it.  Don’t be overly modest, it comes off as insincere.  Be confident of your abilities, but be careful about blowing smoke as people will detect it immediately, and that will be the end of it.  As in most things, a good balance is hard to find, but when you do, it will feel right and will seem sincere.  Practice these conversations, it will pay off.

Remember that your goal is to get in the door, not to get the perfect job.  Just work on that, then once you’re in, you can get what you really want in the long term.

As I said in the beginning, Microsoft isn’t that much different than most other companies, so most of this will apply to other companies as well.  Best of luck in your search.

The New York Times Magazine had a wonderful cover story yesterday about Toyota and their path to world dominance.  This is a great read for most of corporate America, a modern day tale of the tortoise and the hare.

There are many interesting parts of this wonderful article, from the discussion about the creation of the new Tundra full-sized pickup to the parade of companies that try to learn from Toyota’s methods.  But to me the most interesting part is the discussion of the company culture and how their consistent drive for improvement (kaizen) is pervasive.

It seems to me that most of the truly great stories of organizational success are not ones of meteoric rise, they are the result of long slow burns that finally pay off.  As in the world of Hollywood, it seems to me that most “overnight successes” really have decades long histories of pain, tribulation, and persistence.

Even in the rocket-ship ride of the .com era, where most rockets tumbled into the sea, or exploded on the pad, and yet a few hung on to achieve greatness, I can’t think of a truly successful example that didn’t have a long, painful gestation.  The two most oft cited examples of Amazon and Google in fact had their rough childhoods, and painful adolescences, and neither has yet existed long enough to know whether adulthood will suit them well.

In my own experience at Microsoft, the best and most venerable products were ones that were definitively not successes in their first iterations.  Be it Windows, Excel, Word, Internet Explorer, or SQL Server, virtually all Microsoft products of any note were born of a desire to patiently chase down the competition and do what they did better.  The dogged and relentless pursuit of the competition was a key aspect of the company culture, and resulted in version 3 (or 4, or 6…) eventually overtaking the rival.  This happened so much that we used to refer to ourselves as the world’s best “tail-light chasers”.

Which gets me back to Toyota.  The company recognizes, like few do, that developing and nurturing a culture is a key part of making an organization hum.  I talk a lot about mission statements, and how valuable they (and visions) are to organizational success.  Toyota sees that almost instinctively.  To wit:

Toyota’s overarching principle, Press told me, is “to enrich society through the building of cars and trucks.” This phrase should be cause for skepticism, especially coming from a company so adept at marketing and public relations.  I lost count of how many times Toyota executives, during the course of my reporting, repeated it and how often I had to keep from recoiling at its hollow peculiarity.  And yet, the catch phrase — to enrich and serve society — was not intended, at least originally, to function as a P.R. motto.  Historically the idea has meant offering car customers reliability and mobility while investing profits in new plants, technologies and employees.  It has also captured an obsessive obligation to build better cars, which reflects the Toyota belief in kaizen, or continuous improvement.  Finally, the phrase carries with it the responsibility to plan for the long term — financially, technically, imaginatively. “The company thinks in years and decades,” Michael Robinet, a vice president at CSM Worldwide, a consulting firm that focuses on the global auto industry, told me. “They don’t think in months or quarters.”

I love their mission statement (“to enrich society through the building of cars and trucks.”), and will discuss that more soon, but what strikes me most is that last part: “they don’t think in months or quarters”.  Neither do most successful organizations.  They think in terms of what’s right in the long term, and let the current quarter and stock price fall where it may.

When Microsoft was most successful (under Bill Gates and Frank Gaudette’s leadership) it did too, offering essentially no “guidance” to the market.  It seems they may have strayed lately from this view, when a comment from Steve Ballmer sends the stock reeling, and that’s a shame.

The point here is that Toyota and most other great companies, didn’t get there overnight but over decades, don’t plan for tomorrow but forever, and don’t try to justify their actions but rather their philosophies.  This seems to be an anachronism in this go-go, always rushing, instant gratification world.  Bummer.

Tony Dungy and Lovie Smith

With the upcoming Super Bowl, a lot has been said about the two coaches: Indianapolis’s Tony Dungy and Chicago’s Lovie Smith.  Yes, the big story is that they are both the first African American coaches to take a team to the Super Bowl.  But I’m more fascinated with the fact that they are both great managers.

Friends from long ago, it is nice to see two truly “good guys” get to the top of their game.  It’s even a little sad for one of them to have to lose on Sunday.  Reading an item in the Wall Street Journal comparing the two of them with their calm and reasoned style to some screaming managers got me to thinking.

I’ve seen a lot of screaming managers.  The pressure cooker world of high tech seems to attract the a-type personalities that end up as bosses who find volume as an easy substitute for reason.  I’ve seen numerous cases of managers (I can’t say “leaders”) who use intimidation, threats, and personal attacks in their regular daily lives.

Steve Ballmer

In fact, I’ve worked directly for one of the world’s great screamers, Microsoft’s CEO Steve Ballmer.  He is legendary for loud volume, having once required hospitalization for vocal chord damage after an especially vigorous affair.  I’ve witnessed him at his best (a fantastically energizing and motivating speaker) and his worst (reducing senior managers to tears during the semi-annual business reviews).  Steve regularly barging through my door, fully on fire and with no regard to my current situation, was a key factor in my choice to leave Microsoft.

Now, I don’t begrudge Steve, or anyone, the right to get animated and excited when things are going wrong.  Unfortunately, Steve, when in a tough spot, is inclined to take things to a personal level that simply crosses the line.  He goes from criticizing the idea or the results, and moves to things designed to hurt the person.  Although Bill Gates is famous for saying “that’s the stupidest f&*%ing thing I’ve ever heard”, it is more Steve’s style to say “you are the stupidest person I’ve ever met, who hired you?”  It costs dearly in respect on both sides, and never serves to motivate anyone for very long.

The problem is that yelling and intimidation work…  in the short term.  Much like what falsified financial statements, “stuffing the channel”, and keeping secrets do for business, yelling and intimidation do similar things for organizations.  They work for a while, people do scurry around frantically to avoid a follow-on beating.  But soon they tire of the abuse, and before long, they move on or shut down completely and resign themselves to the pain.  Neither makes for a great team.

This brings me back to Dungy and Smith.  As the WSJ article noted:

Both believe they can get their teams to compete more fiercely and score more touchdowns by giving directives calmly and treating players with respect.

This is a pattern I have seen time and again.  Calmer, reasoned, thoughtful leaders get better results, have better loyalty with much lower turnover, and have better luck hiring people (word gets around).  People enjoy coming to work, and don’t live like abused children in fear of the next beating.  They are happy to give extra effort for people who they respect and know respect them.  And undoubtedly, if given enough of a chance, they make the whole organization more successful.  Perhaps they even take it to the top of their game.

There will be plenty of screaming on Sunday, with more than a few fans coming to work hoarse on Monday.  But that won’t be the case for Tony Dungy and Lovie Smith.  The good news is, a great leader is going to win the Super Bowl on Sunday.  The bad news is we don’t know yet which one it will be.  I’ll be cheering for them both.

Update: And the winner is Tony Dungy and the Indianapolis Colts.  Congrats to them all.

Mulally and Ford at the Coronation Announcement

The Wall Street Journal had a marvelous article [ed: unfortunately subscription-only] about the turnaround Alan Mulally is trying to make at Ford.  I have written about this before (see this post here), but put simply, I am a huge fan of Mr. Mulally.  He did great things at Boeing, and from what I can tell from this article, he’s off to a great start at Ford too.

The article goes on to describe in detail how Mulally is analyzing a business he is admittedly new to, and how he’s working on his plan for change at the company.

The fate of this automotive icon rests on the aggressive plans of Mr. Mulally, a former Boeing Co. executive who has spent his career outside the auto industry.  His emerging agenda calls for Ford to plow through “gut-wrenching” change to achieve profitability by 2009.

From what I can see, he’s hitting all the right notes by focusing on brand overlap, silly inconsistencies and waste between brands, and overall efficiency.  Again, this is a guy who has moved mountains at one of the largest employers in the country, I’m sure he can make strides here. “‘I’ve seen this movie before,’ Mr. Mulally told his new executive team when he took over Oct. 1.”  I just wish he could teach our president a thing or two about analyzing situations and facing ugly facts, but I digress…

One of the more interesting notes in the article however, very much caught my eye.

In the executive suite he shares with Chairman Bill Ford, Mr. Mulally says he asked Mr. Ford why he hadn’t integrated the company.  He says Mr. Ford agreed that integration was desirable, but told him it was difficult.  Every time Ford had considered forcing integration, a new hit product — such as the Explorer, Taurus or F-series truck — would come along and propel profitability without tough changes, explained the fourth-generation Ford leader.

To steal from Mr. Mulally, I’ve seen this movie before too.  I have watched more than a few companies put off changes they knew they needed to make because they were blinded by their success.  And the more bright the light from the current success, the more blinded they became to the obvious issues.  It’s important to realize this not only applies to products and/or projects, but also to people.  We tend to overlook the worst part of peoples’ behavior when they are having success as well.

I saw it quite a bit at Microsoft.  It is no secret that the Windows team recently made some major changes in leadership that were long overdue.  Those changes were put off time and again by the product’s stunning profitability and the fear of killing the golden goose.  There are a dozen more, less public, examples of products that were off-target and in need of correction, but still creating revenues that would finance even the most outrageous debacles.

We also had managers who were simply terrible, and yet were continually promoted or rewarded for their results. I discuss this here too, but success postpones many needed HR actions at Microsoft and elsewhere.  I even wrote in the performance review of one jerk who worked for me that he “is being removed from a supervisor position and being returned to an individual contributor role, and should never again be allowed to supervise others.”  He was recently mentioned in a national publication as a potential future CEO of the company.

The point of all this is that, just like dental hygiene, auto maintenance, and many other things, just because you seem to be OK today doesn’t mean your gut instinct that things need to be fixed is wrong.  Don’t let success blind you to the changes you need to make.  And don’t, please, make that jerk your CEO.

There has been quite a bit of hubbub lately over the end-of-year bonuses paid by Goldman Sachs.  It even provoked an op-ed piece in the venerable New York Times.  Totaling some $16.5 billion, and averaging $623,000 per employee, the payouts have set off a firestorm of shock, awe, envy, and more than a few cries of “That’s obscene!”  It’s really funny to see how people react when things not only work as intended, but work perhaps too well.

The more serious people question whether the pay was justified, or was prudent for the company.  With the average employee getting more than $200 an hour, and some reaching into the tens of thousands an hour, it seems inevitable that there would be sour grapes but the real question should be: is it right?

In a word: yes.  It’s fine, and even exemplary.  I think there are three key measures by which to judge a compensation system:

• Is it based on, and does it reinforce, the organization’s goals and objectives?
• Is it applied according to some reasonable, and preferably transparent, methodology?
• Is it fiscally prudent for the organization?

That’s it.  Forget about providing a living wage, or some sense of social fairness, or even public perceptions of the system.  If it meets these three measures, I think it is great.  Let’s look at each of these measurements, and reflect on Goldman’s application of them.

Reinforcing goals and objectives

This is number one for a reason: it is by far the most important.  I’ve said it here on these pages a hundred times, but the key to success in an organization is defining a clear vision followed by consistent daily application of that vision.  There are many ways to apply the vision, but few are more effective than to base compensation on it.  I have built compensation systems that are directly based on the company vision, and the results are astounding. [ed: more on this later]

Does the system at Goldman Sachs meet this test?  Well, from a distance it’s hard to tell.  But I can say that, from what I know of the company, the goal is to make deals and trades that benefit the buyers, the sellers, and Goldman Sachs.  And by all reasonable measures, they hit a home run there.  Pre-tax profit (that’s net, not gross) even with these salaries included was over a half-million per head.  That’s twice the Wall Street average, and 5 times what we so proudly got when I was at Microsoft.

So, even without knowledge of the specific goals and objectives that Goldman set for itself, it’s clear that from a strictly financial perspective, they scored big.  And the compensation system should reward those who exceeded those objectives so dramatically.

Reasonable and transparent methodology

This is the point that catches up so many companies.  Many firms have their compensation set extremely top-heavy, with those who control the purse strings, taking the most out of the purse.  I like to see a compensation system that is based on some simple, clear, and preferably public, metrics.  Typically it’s something like gross sales, or gross profit, or even something like regularly measured customer satisfaction.  Whatever it is, it should be simple, directly correlated to things people actual have some influence over, and difficult to “game”.

Another key component of this is that the compensation system should be very broadly based.  Not just a perk for those at the top, but dipping deep down into the organization, so that all people who have a part in creating the success can share in it.  When I was at Microsoft, virtually all full-time employees were eligible for stock options.  That’s the kind of example I’m stressing here.

From what I can see, Goldman’s scheme meets these objectives.  There are stories of most employees seeing twice to three times their peers at other firms, and this is in line with their company performance against their competition.  Yes there are reports of some secretaries complaining they only got $120k when others saw millions, but that melts when you point out that’s 2x the going rate.  So what this all means is that the system is implicitly broad-based and relatively effective.

Fiscally prudent

This is where Goldman has me completely won over.  You see, they pay compensation in arrears.  They wait until the end of the year, and then, once all the numbers are in, they divvy up the spoils.  This has many great effects, a key one being that they never have to worry about paying for performance they might achieve.  They know both how well the person has performed, and how much they can afford to reward them.  How clean is that?

In addition, they have the benefit of drawing the bonuses not from pending revenue, but from cash on hand.  And they’ve had the better part of a year to invest that money wisely, before they have to pay it out.  I think every small firm that has had to scrape to make bonus payments would do well to consider a scheme like this.

So, in summary, I think Goldman has it just about right.  They pay people from their profits, they do it in a manner that rewards for definitive past performance, and in line with their corporate objectives.  The fact that the company was enormously profitable isn’t something people should resent.  Envy, maybe.  Emulate, probably.

Want to make the minimum wage yet still gross almost $100,000 a year?  Be a dealer in casino in Las Vegas.  Want to make a little more than half that amount?  Be their supervisor.

Wynn Las Vegas Resort

That’s right, even though the minimum wage in Nevada is just $6.15 an hour, because of tips many dealers make nearly six figures.  Their supervisors, the pit bosses, however are salaried and make around $60,000 a year, with no tip sharing.  This inequity makes it hard to convince talented people to leave the table and become a supervisor, with all the challenges that position entails.

Recently, Steve Wynn decided to make a change at his Las Vegas Resort.  Experiencing trouble getting supervisors for his 580 dealers, he added he pit bosses to the tip pool.  This earned him the ire of the dealers, who worried about dilution of the tips and the honesty of the tip counting process which they had long controlled.  It was bad enough that, years ago, the tip process had been formalized so that it was taxable income.  But it came to a head when a generous winner spread out almost $500,000 in tips in a single flurry.  Adding the bosses to the pool diluted the shares by more than 10% and created quite a fuss.

This experience points out one of my most important rules: never make your compensation system dependent on variables that you do not control.  I have learned this one the hard way, and spent one of the most challenging years of my career trying to fix just such a system.

Microsoft was one of the first tech companies to spread stock options well down into the organization, essentially to all employees.  This had the wonderful effect of letting a very broad range of people share in the ride when the stock was on its incessant rise to the stratosphere, and minted numerous millionaires.  The excitement at the company in the late 1990s was palpable.  There is little doubt that the company benefited by paying low base wages and letting this “free” compensation provide the rest.

But of course, there were downsides.  The signs were there, even when the stock was on the rise.  People paid constant attention to the stock price.  There were people spending their evenings writing desktop stock tickers, and mounting led stock tickers in the hallways.  And the pressure to constantly split the stock (which seemed to spur further rises) was enormous.  It was all people talked about for weeks at a time approaching a split.

And obviously, the ride was destined to end.  The company simply couldn’t double in market capitalization every few months without eventually being the equivalent of the GNP of an entire continent.  It just had to stop.  Steve Ballmer (Microsoft’s CEO) was well aware of this, and that when it did stop, it was going to be ugly.  Without a constantly rising stock price, the entire compensation scheme would collapse.

As VP of HR for the company, I used to say that our compensation plan was at the mercy of NASDAQ.  I spent the entire last year of my tenure at Microsoft reconstructing the compensation plan for all 35,000 employees to be less dependent on stock options.  And my successors (there have been three) have spent their tenures furthering the effort.  Given the exodus of key people over the last several years, their job is not complete.

Back to Las Vegas, you can see that having the casino workers’ pay being largely based on tips is dangerous.  Not only do you run into the inequity issues, but the compensation plan is in control of others whose motives may not match those of the organization.  Yes, people tip when they are happy customers, but they also only tip when they win (which doesn’t help the organization), or when they are drunk, or simply when they feel like it.  And if their economic prospects go down, so do their tips.  Is this variability good for the employees?

Clearly, Mr. Wynn swung the pendulum in the wrong direction.  Rather than adding the bosses to the tip plan, he should have crafted a compensation plan for the bosses that derived less from the tips, but on broader organizational objectives.  Some ideas may be to base it on measured customer satisfaction, personal job performance, or even profitability at some level.  Most likely a simple combination of a few measures would be effective.  It’s hard to say without direct input into the process.  Perhaps Mr. Wynn is reading and would like me to look into it…

In any case, this is yet another example of why compensation plans must be thought through carefully.  As I have said repeatedly, you get what you deserve.  If you measure and reward some narrow behaviors, you will get people who respond, and even overreact, to those rewards.  Be careful what you wish for, you will undoubtedly get it.

Bill Gates

With the announcement today that he’s going to step aside, a load of my Bill Gates memories have flooded back for me.  Forgive me while I share those with you.

I’m a fortunate man; I’m among a very small group of people who’ve had the priviledge of working closely with Bill Gates.  When I was VP of HR, he and I had a number of private and quite frank conversations about key members of the Microsoft leadership team.  We worked together to set compensation, decide assignments, and make tough corrective choices.

I’ll never forget the time we worked on his own salary together — it was almost comical.  I had to implore him to take a reasonable number that even vaguely reflected his peers at the top of the Fortune 500.  There I was, trying to convince the world’s richest man to take a reasonable salary.  The company was moving to deemphasize stock and put more weight on salary; I wanted him to lead by example.  To his credit, he pushed back relentlessly and I ended up recommending to the board’s compensation committee a number about 33% lower than what I thought was right.

Bill is a very special person, with legendary business insight to be sure, but it is coupled with a remarkable sensitivty and concern for his key associates.  He treats them much like family-members, with all the good and bad that goes with that.  Yes, his blow-ups are legendary, and he can carve new orifaces with the best of them.  But more often than not, he is concerned about their welfare, about their family, about their mood and attitude.  He values loyalty above most other things, and does not handle defection well at all.

I can think of no one in the world for whom I have more respect, and I know his presence at Microsoft will be sorely missed.  Although well divorced from the day-to-day in recent years, he always served as a settling and humanizing force in the company.  In the face of Steve Ballmer, a legendarily gruff and difficult manager (which I can personally confirm), this influence should not be underestimated.

I will have much to say about the future of the company in the hands of the new management team, but that will have to wait.  Now I’m just too busy enjoying reliving the time I had working with one of the most special people in the world.

Microsoft just announced a number of changes in personnel policies designed to improve sagging morale.  Good for them.  It’s the result of a year of work by a longtime colleague of mine and now SVP of HR, Lisa Brummel.  According to the reports, she spent a year listening to people and came up with a range of changes designed to stem the tide of people leaving.

Most news reports have focused on things like putting towels back in the locker rooms and giving senior people more stock, which are all well and good.  But one point that was overlooked and seems intriguing is the changes they made to the scoring of performance reviews, a personal hot button of mine.

For decades Microsoft has done performance reviews with a rating system that was graded on a 10 point scale, from 0-5 on 0.5 point increments (in a rather silly attempt to avoid the look of a “beauty contest”).  The ratings generally went like this:

• 5.0 – You walked on water, then turned the water into a nice Merlot.  Almost impossible to reach, given to maybe one person a year, I saw perhaps 5 in my career there.  Used to mean you would get a surprise 1-1 visit from BillG in your office.
• 4.5 – Outstanding work, really above and beyond the call.  Used to mean something like 100 hour weeks, and with amazing results.  Hard to get more than one of these without a promotion.  Very small percentage of people: < 1%.
• 4.0 – Great work, excellent results, clearly leading the pack.  Something like 10-15% of the people would get this score.
• 3.5 – Solid work, well done, everything is fine.  Most people (e.g. 70+%) would get this score.
• 3.0 – You have a number of things to work on, some of them are threatening to your livelihood.  You must improve or you are at risk.  This was managed by HR to be about 10% of the team.  There was always pressure for managers to give someone a 3.0, although the 10% was never rock-solid.  But come on, SOMEONE on that team isn’t doing everything perfectly.  If you got a string of 3.0s you are in trouble.
• 2.5 – This is the first step before the exit.  If you get a 2.5 and don’t get fired, it means you got the message.  If you get a 2.5, you had better either have an exit plan, or be working your butt off to save your job.
• 2.0 – Security is waiting outside my door to take your badge and help you pack.
• 0 – 1.5 were unused.

This system worked fine for years (e.g. the last 25 years), but was always a source of complaints.  Some people didn’t like the subjective nature of reviews –- come on, performance reviews are subjective, that’s why you do them.  Some people didn’t like being rated like cuts of beef (oh, get over it, you’re rated every day by your salary, by your peers…).  But the biggest point of pain seemed to be the requirement for people to give a reasonable percentage of people a 3.0 or lower.

This can be seen as a Jack Welch’ian “toss out the bottom 10%” but in fact it just stemmed grade inflation.  And reasonably speaking the world is not Lake Woebegone where everyone is above average.  Some people in every group need to improve.  So Microsoft required groups of more than just a few to have something like 10% rated 3.0 or below.  This is just reasonable.

Now, in this new system they have gone away from numbers and gone to words.  As I understand it, there are now three categories: “Exceptional”, “Strong”, and “Needs Improvement”.  Seems to me that is the same as 4.0, 3.5, and 3.0 — but nobody asked me.

More importantly, however, this has made a good system worse.  Not at the bottom of the scale, where it simply replaced a number with a name — they still need to worry about grade inflation, and there will still be groups that get told “oh, come on, you have to have at least some ‘needs improvements’.”  No, my concern is where it should be: at the top.

Rewarding good performance is at least as important as correcting poor performance.  And now Microsoft has lumped all good performers together in a lump.  No longer will the true stars stand out from the really hard workers.  No longer will people who achieve “Exceptional” (aka “better than average”) have motivation to strive for more.

And why did they change this?  Because people at the bottom were offended.  Ouch.  Seems like a big mistake to me.  I’m a huge believer that the best performers aren’t just better than average, they are 10 times better than average.  You need to worry more about those people than anyone else.  This seems like a move in the wrong direction.