By Matt Rosoff [bio]
Posted: Jan. 15, 2001

• Chart: Employee Attrition Rates

Faced with blows to worker morale, a continuing trickle of departing executives, and a sharp increase in employee attrition, Microsoft is trying to make itself a more appealing place to work. The company has taken the unusual step of granting raises and new stock options in its February review, and has instituted some policies to help reduce burnout. But Microsoft must also address nagging problems, such as a perceived lack of career opportunities and cross-departmental coordination, in order to alleviate the problem.

Employee Attrition a Growing Problem

Numerous high-level employees with more than 10 years' experience left or announced their intention to leave in 2000. Most recently James Ewel, vice president of Server Product Management, and Thomas Koll, vice president of the Network Solutions Group, announced their departures. Other key figures to jump ship in 2000 included Platforms Group Vice President Paul Maritz, Developer Marketing and Platforms Solutions Vice President Tod Nielsen, and Chief Technology Officer Nathan Myhrvold.

Although the loss of institutional memory in high-level, experienced employees is a problem, even more alarming is a sudden spike in attrition levels throughout the company. According to statistics presented by Chief Operating Officer Robert Herbold at the last three Financial Analyst Meetings (see the accompanying chart, "Employee Attrition Rates"), attrition at Microsoft has been between 7% and 8% since fiscal year 1995. In FY’00, it hit 9.6%—the first time it has crested the 9% threshold since FY’94.

Microsoft's attrition rates, while lower than industry averages, are rising when the rest of the industry's are falling. According to research by the Saratoga Institute, the median rate of voluntary employee separation of employees in the computer and software services industry has dropped from14.7% in 1997 and 1998 to 11.4% in 2000. A report by human resources consultants Hewitt Associates also pointed to a drop in attrition among IT professionals with highly marketable skills—from 16% in 1999 to 12% in 2000.

Employees quit Microsoft for several reasons. While some of these reasons apply to any high-intensity firm, some are particularly important at Microsoft because of factors such as the company's size, reputation, and internal culture.

Burnout

Technology workers are notorious for working long hours and taking few vacations, and Microsoft is no exception. However, Microsoft, in contrast with old-guard technology firms like IBM, has historically had a very young workforce. Now this workforce is aging: in 1991, the average age of a Microsoft employee was 30; by 1999 the average had crept to 34. Many of its experienced employees are now starting families, leading to new conflicts between work and personal life that were not felt so sharply five or ten years ago.

Microsoft has made some progress addressing work-life balance. In 2000, the company instituted a "partnership program" for top executives and software developers, removing caps on vacation time. And a survey conducted by Fortune Magazine for its annual "100 Best Companies to Work For" issue suggests that a cultural change is underway: in 1996, only 42% said that they were "encouraged to balance their work and personal life," while the 2000 figures showed 68% agreeing with that statement.

Nonetheless, anecdotal evidence suggests that life as a Microsoft employee is still mostly work—the parking lots are full seven days a week, vacation periods are reportedly difficult to plan ahead, and project schedules are aggressively optimistic, leading to a culture of "constant crisis" when deadlines are missed. The cultural change from a hyper-competitive startup mentality to a mature company where employees are encouraged to use up their allotted vacation time and take three-day weekends cannot simply come about through statements of good intentions in memos and speeches—specific policies about time off must be implemented and enforced from the top brass down.

Perceived Lack of Career Opportunities

In 1995, when attrition rates at Microsoft were decreasing year-to-year, consumer PC software was widely seen as the most interesting and potentially lucrative market in the computer industry, and Microsoft was the undisputed leader in the field. Since then, several high-profile markets have emerged in which Microsoft is not number one, including the much-hyped "dot-com" market of Web services, back-end Web software and infrastructure, handheld computing, and wireless technology. Microsoft employees, seeing press coverage shift to other companies, may perceive that they are missing out on hot opportunities.

The problem of career development is particularly acute at higher levels: many long-term Microsoft executives now have the funds and industry experience to create their own start-up companies. If these executives lose a fight over a particular technological implementation or proposed strategy move, it is easier than ever for them to walk away and test their ideas in the open market. Add in the possibility of receiving a subpoena for workplace e-mail records or being called to testify in the Department of Justice (DoJ) antitrust case, and the thrill of working at Microsoft drops even further. (Of the nine executives who testified in the DoJ case for Microsoft, only five still have active high-level positions in the company.)

The 2000 stock market drop and subsequent venture capital drought has somewhat diminished the appeal of starting or working for an unproven start-up, but Microsoft will need some key wins, and corresponding positive press coverage, to regain its former image as the most exciting and relevant place to work in the technology industry. Microsoft's core business remains rooted in operating systems and desktop applications: stronger signs of Windows 2000 adoption and positive reviews and strong sales of Whistler and Office 10 could lead to a renewed sense of Microsoft as a place where big things are happening. Aspects of its consumer strategy, particularly the MSN portal and the XBox, if wildly successful, should also lead to positive ink in the mainstream press—something that's been in short supply since details of the DoJ antitrust trial began hitting the wires in 1998. And of course, a favorable settlement or Microsoft victory in the ongoing antitrust case will help shore up morale.

On the other hand, losses in any or all of these areas could have the opposite effect.

Lack of Companywide Coordination

Microsoft’s scope is unusually wide for a technology company (only IBM springs to mind as a comparably diverse technology firm), yet it must still respond quickly to the rapidly changing computer industry. Often, as a result of this diversity, size, and competitive pressure, different groups within Microsoft work on solutions to a similar problem with little centralized coordination. In addition, its aggressive acquisition strategy means that acquired employees and technologies must frequently compete against solutions germinated in house. These scenarios can lead to frustration as redundant projects are cancelled, meaning that the hard work and overtime were for naught.

A December memo from CEO Steve Ballmer to all employees, sent after Microsoft announced its first prospective earnings downgrade in 12 years, gave some hint that the company is aware of this problem. The memo specifically suggested eliminating "redundant technologies," and pointed to the decision to cut the Local Web Storage system from Office 10 and to focus development resources on the next version of SQL ("Yukon") as an example. (Both systems offer Web-accessible, indexed data stores for documents as a prime feature.) If the company continues to make these difficult decisions and narrow its focus, it could lead to fewer cancelled projects and focus more employees on activities that are the most crucial to the company's success, and therefore, the most satisfying to work on.

Structural changes, such as eliminating dotted-line reporting to managers in multiple groups, which can create conflicting loyalties and goals, could also help, although no reports have come out indicating that Microsoft is considering this as a companywide move.

Stock Options and Compensation

A large part of Microsoft's lure has been the possibility of becoming exceptionally wealthy thanks to the company's generous stock option grants. Unlike salary, however, the value of stock options is subject to the fluctuations of the market, leaving Microsoft vulnerable if they rise or fall too sharply. When Microsoft's share price was at all-time highs in late 1999 and early 2000, many long-timers chose to cash out and take early retirement, or used the funds to start dream businesses. Now that Microsoft's share price has plummeted, any options granted after mid-1998 are currently "underwater" (that is, their strike price is less than the current stock price, rendering them temporarily worthless), serving as little incentive to stick around until vesting time.

Addressing these issues, Ballmer's memo noted that the company would be taking the unusual step of increasing regular compensation in the February employee reviews (usually, compensation changes are saved for the annual review in August), which should make financial rewards less dependent on the stock market. Nonetheless, stock options remain a powerful worker incentive, and Microsoft will continue to use them: according to another memo from Ballmer that became public in mid-January, the company will be granting new options at February reviews. The memo contained the unusual suggestion that employees tell their family and "possibly their friends and people outside Microsoft" about the new grants, suggesting that the company wants to spread the message: whatever the drawbacks of working at Microsoft, skimpy pay is not one of them.