Monday, September 21, 2009

How Microsoft Will Save Us from the Housing Crisis

Kudos to Michelle Leder at Footnoted for spotting another distasteful perk paid for by hapless shareholders. This one was at Microsoft (MSFT) -- which is a long holding of mine.

Microsoft has earned some praise recently among those who promote good corporate governance practices for blogging (I guess that demonstrates openness, but what's the big deal?) and proactiviely allowing a triennial (once every 3 years) shareholder vote on executive compensation. I guess every dog has his "say on pay" day -- once every 3 years, at least.

This last disclosure came out late Friday in Microsoft's preliminary proxy.

Michelle studiously noticed that in that same filing, Microsoft disclosed that it may outdo the Fed and the Obama administration in saving the country from the current financial mess. Specifically, they are going to focus on the housing mess and try to stabilize the market one Bay Area executive mansion at a time.

When they hired Stephen Elop away from Juniper Networks as COO in early 2008 (where, coincidentally, Microsoft's former head of its rudderless Online Services Business Kevin Johnson decided to take the top job later), Microsoft disclosed that they took the rather unusual step of buying Elop's Silicon Valley mansion.

The reason for this was that Elop apparently couldn't sell it. Therefore, using bizarre executive comp logic, he hired 3 independent appraisers to peg the value of his home and got Microsoft's shareholders to pay him that amount for the home. This was all to "induce" him to take the job of heading up Microsoft's Business Services Division in Redmond. I know it rains more in the winter in Seattle, but that's quite an "inducement." I guess the "war for talent" is brutal -- even in the biggest recession since the Great Depression.

There's no disclosure on who these 3 appraisers were or what value they assigned to the house -- or how much they were paid for their assessments and who paid them (though you have to assume again it was Microsoft's shareholders).

Then, come some more details in the filing:

We also agreed with Mr. Elop that if the appraisal resulted in a loss on the sale of his prior home, we would pay him the difference between his home purchase price (adjusted for improvements) over the appraised value. Because of the precipitous decline in the California housing market over this period, the price at which the house ultimately sold was significantly below Mr. Elop’s purchase price adjusted for improvements.

What was the damage for Microsoft shareholders and the purchase of the mansion and making Mr. Elop whole on his original purchase price and home improvements? $4.2 million.

Adding insult to injury, Microsoft then decided to "gross up" Mr. Elop $1.2 million for these additional benefits, so they wouldn't cost him a dime with the IRS and the State of California. Microsoft shareholders will again happily pick that up.

When did you say I'll get a vote to say how I feel about these perks? Oh right, 3 years from now.

It doesn't end there. The proxy filing also goes on to say that Microsoft has flipped houses for its corporate executives before, specifically for current CFO Chris Liddell, when he decamped from his CFO job at International Paper in Memphis, TN, for the rugged Northwest. The kiwi (Liddell is a New Zealander) got a $2 million relocation expense paid for related to buying and then selling his house (and only a $30k "gross up").

Other interesting tidbits from the Microsoft proxy filing:

  • Microsoft spent $472k with Corbis Corporation on digitized images last year. Corbis is owned by founder Bill Gates. However, Corbis spent $370k on Microsoft software in the same year.
  • Ray Ozzie's brother works for Microsoft; as does Robbie Bach's nephew. Both relatives earn more than $120,000 a year -- although no more details are provided.
Although I've seen other companies with more egregious perks for their execs than this, these disclosures are still distasteful and the expenses (and taxes) should be covered by the executives themselves -- not shareholders.

If Elop couldn't sell his house in the Bay Area and he didn't want to carry the mortgage on it while moving to Seattle, that's his decision. As a shareholder, I'd say let's find some other executive who does want this exciting opportunity. Enough with the "that's what we had to do to get this talent" logic. There are many talented people that would have jumped through hoops for this job.

It's too bad Elop and Kevin Johnson couldn't have coordinated their plans to switch jobs at Microsoft and Juniper Networks. They could have saved shareholders a lot of expense by just doing a house swap.

[Jackson's fund holds a long position in MSFT]

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