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April 22, 2011 at 9:29 AM

Microsoft pay raises expected to boost local economy

This story ran in the print edition of The Seattle Times on April 22, 2010. -Sharon Pian Chan

In the midst of a slow-going economic recovery, economists say the unprecedented pay raises Microsoft announced Thursday are a harbinger of hope for the Puget Sound area’s economy.

Every new dollar earned by each of the 40,000 employees who live in the region will generate another dollar in car sales, restaurant meals, sales of flat-screen televisions and maybe even housing sales.

Microsoft Chief Executive Steve Ballmer said Thursday in an email to all 88,000 employees that the company is making “the most significant investment in overall compensation we have ever made.”

Ballmer said the company is making this investment to attract and retain employees, who might otherwise be lured away by tech companies such as Google and Facebook. “The changes we’re rolling out today will help ensure Microsoft continues to be the place that top talent comes to change the world,” he wrote.

The company declined to give specific numbers on how much it will invest or how much wages will rise for the average employee. The raises will not take effect until later this year. And while Microsoft says the compensation changes apply across the board, employees will see different wage increases. Research-and-development jobs, middle managers and certain areas will see bigger bumps.

“This is exactly the kind of positive news that encourages me about the prospects for our state’s recovery,” said Washington state Chief Economist Arun Raha. “I expect this to have an impact in the areas surrounding where Microsoft employees live in every kind of standing — cars, consumer goods, houses.”

As part of the new compensation plan, Microsoft employees will receive higher base salaries. More employees, 80 percent instead of 50 percent, will earn the full amount of their cash bonuses. Some of employees’ stock awards will be awarded as cash instead of stock.

The stock is a sore subject with employees and investors alike because it has moved little over the past 10 years. In the early days of Microsoft, employees wanted stock options because the share price was rising so quickly. In 2003, the company began giving stock awards instead of options.

Raha said the changes will spur employees to shop. “Any time you take money that’s unsure and you make it sure, that’s positive,” he said. “The ability to recruit and retain top talent is a plus for the state.”

And, he said, other companies competing with Microsoft will likely raise their wages.

The changes Microsoft announced do not include contractors. Contracts with third-party service companies were cut 10 percent in early 2009, and many of those companies passed the cut to their employees.

The average wage for a computer programmer in Washington state as of March 2010 was $91,631, according to state employment data. And while Microsoft declined to say how much average pay would rise, competitor Google gave a 10 percent raise to all employees earlier this year.

Dick Conway, co-publisher of the Puget Sound Economic Forecast, gave a hypothetical estimate.

Theoretically, he said, if the average local Microsoft employee makes $100,000 and receives a 10 percent raise, that would create another $10,000 per 40,000 Microsoft workers in the Puget Sound region, for a total of $400 million.

“Now typically — and this is based on models that we use for forecasting and simulation — if you create a dollar in income in the region, the multiplier effect will be equivalent to another dollar,” he said.

He expects new money would go toward consumer spending, would create jobs in retail, trade and services, and could potentially decrease the number of layoffs in the state’s public sector because of the revenue that would be generated by retail sales-tax income. Conway does not expect the wage increases to have an impact on the housing market.

The hypothetical 10 percent raise would represent 0.7 to 0.8 percent of the total salaries of all Puget Sound workers in 2011, he said.

“That number might sound small, but it certainly is significant,” Conway said. “This is the kind of boost that we’ve been looking for to get us out of the recession. Technically the recession ended almost two years ago, but in fact we’ve seen very little employment growth and very little income growth. So this is the kind of thing you hope to see to get the show on the road again.”

Microsoft also announced a major change to how it reviews employee performance. The new system will grade workers on a rating scale from one through five, with one being the highest score.

In 2006, Microsoft went to a rating scale that divided employees into three percentile groups: 20 percent considered “outstanding,” 70 percent considered “strong” and 10 percent considered “limited.” Before 2006, Microsoft ranked employees on a numerical scale between 2.5 and five. Both of the previous systems graded employees on a curve and forced distribution of bonuses and raises. Microsoft declined to comment on how raises and bonuses would be allocated across the new ratings scale.

Mini Microsoft, an anonymous blogger who writes about working at Microsoft, said Thursday in a post: “So we have a new review model. And a rework of our compensation. With cash, cash, cash. Forget that Microsoft stock because it’s dead in the water and today’s Microsoft employee is all about the paycheck.”

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