Q1Information Problems, Asset Recognition, and Executive Compensation

Microsoft Inc. is a leading US technology company. Founded in 1975 by Bill Gates, Microsoft has a relatively long history for a tech company. It is best known for its Windows operating system, the Office package, and its Surface computer series. However, more recent main products include the Teams video software, the Xbox video gaming platform, and, most notably, its cloud computing platform Azure, its most profitable business.

Since 2014, Mr. Satya Nadella is the CEO of Microsoft, and perceived to be critical for the future of the firm. Providing appropriate incentives is therefore key to reward Mr. Nadella for his efforts to further grow the company.

Mr. Nadella receives a competitive fixed salary and both cash and equity incentives, where the latter have changed in 2022 as follows (excerpt from Microsoft's 2022 Schedule 14A Proxy Statement):

Pay Element FY21 Elements / Metrics / Weightings FY22 Elements / Metrics / Weightings Annual Financial Cash . Incentive Plan Revenue (35%) 70% Financial (no change) . Incentive Plan Revenue (35%) 70% Incentives . Incentive Plan Operating Incentive Plan Operating Income (35%) Income (35%) Operational . Product & Strategy (10%) 30% Operational (new) . Product & Strategy (10%) 30% . Customers & Stakeholders . Customers & Stakeholders (10%) (10%) . Culture, Diversity & Sustainability* (10%) . Culture & Organizational . New name for fiscal year 2022 Leadership (10%) Long-Term Performance Stock Award Performance Stock Award (new) Equity Three, one-year performance Three, one-year performance periods with periods with following metrics: 70% following metrics: 100% . Commercial Cloud Revenue . Microsoft Cloud Revenue* (30%) (33%) . Microsoft Cloud Subscribers Growth* (20%) . Commercial Cloud . Teams Monthly Active Usage Growth (20%) Subscribers (32%) Xbox Game Pass Subscribers Growth (10%) . Teams Monthly Active Usage Windows OEM Revenue Growth (10%) (20%) . Linkedin Sessions (10%) . Xbox Game Pass Subscribers . New name for fiscal year 2022 (5%) Surface Revenue (5%) . Linkedin Sessions (5%) Relative TSR Modifier. . 3-Year Relative TSR modifier (0.75- 1.5x) as compared to the S&P 500 . If Microsoft's TSR is positive and above the 60th percentile, payout modifier is above 1x, with up to 50% upside at the 80th percentile or above . If Microsoft's TSR is below the 40th percentile, payout modifier is below 1x, with up to 25% downside at 20th percentile or below Stock Award 30% Stock Award (new) . Four-year ratable vesting . Four-year ratable vesting 0%Fiscal Year 2022 PSA Metrics Performance Metrics Description Weights Microsoft Cloud Revenue* Revenue from Azure and other cloud services, Office 365 Commercial, the commercial portion of Linkedin, Dynamics 365, and other commercial cloud 30% properties Microsoft Cloud Paid seats for current or new per-user Saas cloud services primarily in Subscribers Growth 20% commercial customer segment Teams Monthly Active Usage Unique monthly active users of Teams in Enterprise, Corporate, Small and 20% Growth Medium Business, Education, and Consumer Xbox Game Pass Subscribers Growth Current number of paid Game Pass Subscriptions (Console, PC, Ultimate) 10% Windows OEM Revenue* Revenue from sales of Windows Pro and non-Pro licenses sold through the OEM channel 10% Growth Linkedin Sessions Measure of member visits as a leading indicator of the overall quality of the Linkedin member experience and opportunity for members to realize their 10% economic opportunity . "Microsoft Cloud Revenue" and "Windows OEM Revenue Growth", when used as PSA metrics in this Compensation Discussion and Analysis, are non-GAAP financial measures defined on page 51