New Microsoft Reward System

Okay, I’m still busy inventing but I had to comment on this one since I’ve written so much about it previously.  So the complaint was that Microsoft’s previous reward system based on stack-ranking employees was demoralizing and “unfair” causing internal politics and gamesmanship.  Thus a NEW reward system is required that doesn’t cause these problems.  The solution is to place more emphasis on rewarding teamwork and to give managers more freedom in allocating rewards… but apparently NOT to change the SIZE of the total reward budget.  So what does it mean when you reward “teamwork” and make the direct manager responsible for allocating compensation?  Rewards are distributed more uniformly across the team and rewards for “exceptional” contributors shrink.  Now the managers have no excuse for being disempowered about how they allocate rewards and they don’t want to be unpopular so they will tend to spread rewards more uniformly.  Exceptional performers will no longer be exceptionally rewarded, the politics and gamesmanship will move towards manipulating your manager for better compensation and the entire system will reward mediocrity over excellence.  Will everybody be happy now?  Of course not because the only people who bitch about the “unfairness” of any given compensation system are the people who are NOT getting exceptional compensation.  What they really want is a rewards system that will reward THEM MORE.  Basically Microsoft is announcing that they are giving up their famous culture of demanding competitive excellence in favor of rewarding people for getting-along better… as though ambitious people are actually motivated by being incentivized to get-along MORE than is necessary to achieve maximum productivity.

Why is Microsoft making a change like this now after so many successful years on the stack-rank system?  Probably to try to improve retention during a leadership transition.

One of the most interesting and successful management tricks I ever witnessed was a former VP of engineering who worked for me who would identify the people on his team that were most “looked up to” by their peers and privately offered them an individual bonus if a particular project was completed on schedule.  They would work harder and others seeing them working harder would also step-up resulting in much higher overall productivity.  The technique also had the beauty of not producing an on-going compensation expense in the form of a raise for people who didn’t consistently perform exceptionally on their own.  It turned out to be a very cost efficient and measurable way to improve productivity.  I’m still ambivalent about how I feel about it… but it worked… I suspect that if it ever became a widely “known” practice within an organization, people’s productivity would drop to zero until they were bribed to do anything but for hitting critical milestones, it was effective.

In general employees on teams have an unspoken social-pact NOT to show one another up at work by overtly outperforming one-another.  People outperforming one another on a team also results in discord by embarrassing their peers and demonstrating to their management that they could ALL be more productive.  Without a specific incentive to reward exceptional performance teams will converge on doing the least work necessary to collect paychecks and incremental raises.  Exceptional performer’s ( people who take pride in being the best at their jobs regardless of compensation ) will quickly be recruited away by companies that recognize their value at much higher compensation levels.



  1. Classic…
    So a review system employed by the most successful managers and companies in HISTORY is now reviled because mediocre lazy people don’t like being held accountable for their performance and that’s a BAD thing. The idea that “stack-ranking” causes the politics NOT people competing for limited compensation resources under ANY system is also absurd. NOT stack ranking people only reduces politics because it also reduces the incentive for people to perform exceptionally. The idiots who write this nonsense in the media who have never run a company imagine that getting along == teamwork and/or more productivity. NOBODY thinks they are a mediocre or poor performer but MOST people are… there is no system that reviews people’s performance honestly that MOST people will like. The people being reviewed in these systems are also among the top 5% most highly educated and highly paid people in the country, falling short on these stack curves may mean that they only make 2X-3X the average income for a family of 4 instead of 4X+.

    Marissa needed to unload 600 lazy, entitled, California millennial employees, how was she supposed to select them… randomly? If their contributions to Yahoo’s success exceeded their cost there wouldn’t be layoffs would there?

    Also the idea that stack-ranking systems don’t recognize team-work is absurd. If you read my earlier postings of Microsoft’s actual manager review forms and review guides, it’s apparent that being a great team player was HIGHLY recognized as an essential attribute of an exceptional employee. The complaint that exceptional people don’t want to cluster on the same teams is also bogus… it is a desirable feature of the system to encourage these people to be uniformly distributed across the organization providing leadership and role-models to all of the less productive employees. The part of the system that is NOT disclosed to the employees is that the overall SIZE of budget grants to various departments MAY vary depending on how valuable those departments are to the companies core business, thus highly performing teams in highly profitable groups get bigger reward budgets to distribute. The other desirable feature of these systems is to encourage under-performing people to change jobs within the organization in the hopes that they will find a niche and/or a team where they are MORE valued and a better fit. A certain amount of “managed” churn as a result of this system was considered desirable feature of the system because it prevented organizational stagnation and sifted people in to their most productive roles to the company over time, while eventually and gently pushing out the consistently poor performers. The complaint that these systems “CAUSE” churn is also nonsense, the “churn” Microsoft experienced would have been EXACTLY the amount they wanted based on how large the overall compensation budget was. What a stack-ranking review system creates is a managed churn out of lesser performers and an accumulation of higher performers, as desired.

    …again we are talking about people who sit on their butts and push mice around for a living… there is NOTHING strenuous or demanding about their jobs compared to people who do ACTUAL physical work for a living. Their compensation is entirely based on the effectiveness with which they communicate with their peers and the commercial VALUE of their mouse movements and that abstract productivity curve can be very very wide between a top performer and an average performer.

    The real source of complaints and contention was mediocre performers NOT liking being told the truth about their value to the organization and exhibiting one of the personality traits common to mediocre people, exhibiting jealousy and derision for better performers instead of learning from them and stepping up. Mediocre performers make excuses for their failings and blame others to avoid doing something about them. As I’ve written previously, the simple test that anybody unhappy with their performance review can run to find out if their review was “FAIR” is to get a higher paying job elsewhere. The people who STAY in their current jobs and bitch are apparently OVER compensated according to the market.

  2. Actually Stack ranking had an interesting effect on Microsoft. It rewarded Fiefdoms and intra-corporate infighting. I have no idea if this new method is any better but what they had in the past was definitely not a good system overall.

  3. I’m trying to reconcile your rail against Windows 8 and executive/employee compensation. With any kind of compensation system, customer goodwill is usually fodder. You can achieve KPIs by drawing down the goodwill, but that only hurts a company’s credibility in the long run. Shipping software is placed ahead of spit and polish, because the former is easily measured, and less risky in light of the Vista debacle.

    I wonder if Stack Ranking vs Teamwork based ranking are to be considered Yin Yang pairs. You can’t just have one system forever because it encourages certain classes of pathological behaviors.

    • I agree with your observation that change for its own sake can be beneficial to an organization that has become entrenched in its ways. I don’t believe that Microsoft’s review system was even remotely responsible for internal competition and fiefdom creation… people do that all on the their own with NO incentives required. I don’t get how they are ying and yang either because the DEFINITION of exceptional performance in the stack system was providing great teamwork and leadership. I think blaming the system is an excuse. I actually posted the management review documents for the stack system from my era at Microsoft, take a look at them. What about that system could possibly be construed as “rewarding” unprofessional conduct, fiefdom building or anti-teamwork?

      Here’s this article, but I’d swear that I’d actually posted a Microsoft Manager handbook from 1995 that actually walked you through the whole review process, I’ll try to find it.

    • I’ll be darned. I thought that I had previously posted a complete Microsoft managers handbook on the stack rank system from 1995, but apparently not. I guess I scanned it and didn’t share. I’ll dig that sucker up and get it live, I think it’s a very interesting document.

    • Ah, I found it! Here it is;

      Page 18. Teamwork
      Page 19. Communication skills
      Page 21. Interpersonal skills
      Page 22. negotiation and conflict management
      Page 23. Open Communications
      Page 24. Organizational Agility
      Page 25. Developing people
      PAge 26. Strategic Leadership

      These were considered essential attributes of “exceptional employees” Do you think that people engaging in internal battles and creating closed political fiefdoms got top performer marks from THIS review system?

      • Actually there was more to this document than I posted, I think I must have gotten sick of scanning it. I’ll try to dig up the rest.

        • I think what high-tech people fail to appreciate about their privileged careers is that because the market is so starved for technical talent they are overpaid to begin with. Companies are forced to PAY more than people have proven themselves to be worth to hire engineers. Once a company has over-paid to recruit an engineer they are starting from the bottom of a “value well” to justify the inflated salary they were able to command. When they don’t get outsized bonuses and raises for what they imagine to be their exceptional performance, they quit and get over-paid again by the next employer desperate to recruit engineers. The cycle repeats endlessly in the valley with relatively few people actually sticking with a job long enough to GENUINELY contribute to a businesses bottom line, which generally takes a great many years of dedicated contributions to achieve. I recall vividly attempting to recruit some new college graduates into Hi5 in the valley. We hired a group of three of them. When they came in for orientation I told them;

          “Welcome to Silicon Valley, by virtue of my hiring you, you will be able to command a premium salary in this area for the foreseeable future regardless of your competence. Even the laziest most useless people with CS degrees have jobs in California. I tell you this in the hopes that you will not choose to join their ranks. To actually become valuable, contributing employees to any business will take years of hard work, experience and dedication. The people who shoulder this challenge are the ones who generally actually become genuinely wealthy at an internet startup, the rest can hop from job to job getting an incrementally higher salary with each hop and never become accomplished or valuable engineers.”

          Disappointingly, none of that batch lasted six months, they quickly realized that they hadn’t learned a damn thing in college, that real work was demanding and had a steep learning curve and started job hopping for raises. Disappointing. They can get 75K-90K out of college with no real skills and job hop to 130K plus before anybody cares that they don’t know how to finish anything they start.

  4. Alex, decimation had a devastating effect on the morale of the Roman army. It makes everyone worry about numero uno. In contrast, a bonus system that punishes the entire team for underdelivery might work better.

    • …I think you picked the wrong analogy for that point Chui. Decimation was specifically designed to prevent soldiers from acting IN their own individual interests by punishing the entire unit when individual soldiers deserted or broke ranks… and it worked… which was why the Romans did it. The Romans also made the head mason stand under the scaffolding of the arches they designed as the scaffolding was removed to ensure that the head mason was diligent in their supervision of the arches construction… little wonder they had an empire that lasted 1000 years. In Microsoft’s case they rewarded individuals who were superior team players and decimated teams that underperformed which would be the opposite of the Roman decimation approach… Personally I think we lost something when FEAR was outlawed as an employee motivation tool. 🙂

    • Worse than the Roman practice actually. A stack ranking system effectively guarantees regardless of how well or badly the team performed, someone is going to get decimated. A less talented grunt will be motivated to ensure spanners are thrown into works to bring other people into line.

      • Ah, that’s to simple a conclusion Chui, actually people had to consistently be on the bottom of the stack for two review periods to get bumped and then they had several months to find a new role in the company. Because somebody had to get the bottom rank there was actually a market for them among teams so somebody always wanted a few folks who wouldn’t expect to be at the top. To ACTUALLY get decimated you had to be SO useless and burdensome that NOBODY wanted you on their team even for an easy low review… only then did you lose your job… and given how much warning you had, THAT only happened if you really couldn’t find another job anywhere in the industry… which was a pretty amazing feat for any CS major with Microsoft on their resume. You had to be a real train wreck to manage that. Also a manager could keep two folks on the bottom indefinitely by rotating their stack position every review cycle which meant a cushy low expectation job for the folks willing to take the bottom reviews. Active sabotage would earn you a bottom review quickly and everybody on your team would be grateful to you for taking the hit. So the stack rank system DIDN’T actually guarantee decimation and it created a market for poor performers. A top performing team DID get a bigger bonus budget to distribute along the reward curve so there was an incentive to be a top team.

        Also recall that Microsoft’s PRIMARY reward was stock options and later stock grants, so burned out engineers wanting to vest their shares and take it easy would covet a bottom stack position to rest and vest. It was a very brilliant system for Microsoft’s culture if you appreciated its nuances. If you wanted to coast, go home at 5pm and keep your salary after burning out on a long project and getting a ton of stock, somebody would want you on their team for a while. It suited Microsoft to REWARD resting-and-vesting because they preferred to pay your salary over having you join a competitor and people often got their mojo back after a break and would become top performers again. It wasn’t a HINDU caste system you were born into and couldn’t rise out of IF you wanted to.


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