2018 Guide to Effective Proxies

2.17.4 Compensation mix | 335 6 TH EDITION | GUIDE TO EFFECTIVE PROXIES 2 BOARD OF DIRECTORS 4 AUDIT COMMITTEE MATTERS 5 OTHER MANAGEMENT PROPOSALS 6 INFORMATION ABOUT THE MEETING 1 CORPORATE GOVERNANCE AT MICROSOFT 3 NAMED EXECUTIVE OFFICER COMPENSATION At the 2016 Annual Meeting, 96.1% of the votes cast supported our advisory resolution on the compensation of our Named Executives (the “say-on-pay” vote). In fiscal year 2017, our Chairman, our Compensation Committee Chair, and members of senior management have spoken about our executive compensation with shareholders owning almost 45% of our shares. During these discussions, we reviewed our executive compensation philosophy and sought shareholder views on our plans to introduce more performance-based pay in fiscal year 2017 for all executive officers. The feedback gained from these interactions was important to the design of the executive compensation program. Shareholders generally viewed the evolution of our compensation plan as consistent with what the Company previously communicated in its outreach over the past three years. Based on input from our shareholders, the Compensation Committee determined that the fiscal year 2017 executive compensation program substantially addressed their views about our pay plan. Annual compensation components Our Named Executives’ annual compensation consisted of annual base salary plus annual cash and equity incentives awarded under our Executive Incentive Plan (“Incentive Plan”). Annual cash incentives were performance-based, with 50% determined formulaically based on achievement against pre-established financial targets, and 50% determined qualitatively based on performance in three weighted performance categories. Equity incentives under the Incentive Plan were 50% performance stock awards (“PSAs”) and 50% time-based stock awards (“SAs”). Over half of Microsoft’s target pay is performance-based and almost three-fourths is equity-based FY17 PSA FY17 cash incentive Fiscal year 2017 compensation structure Financial/ formulaic (50%) Commercial cloud revenue (34%) Commercial cloud subscribers (33%) Windows 10 monthly active devices (11%) Surface gross margin (11%) Consumer post-sales monetization gross margin (11%) Incentive Plan revenue (25%) Product & strategy (16.67%) Incentive Plan operating income (25%) Customers & stakeholders (16.67%) Culture & organizational leadership (16.66%) Qualitative (50%) Salary Cash incentive Stock awards Performance stock awards Relative TSR multiplier is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500. 19.2% 7.6% 36.6% 36.6% NEO pay mix 34 IncentivePlanRevenue(25%)IncentivePlanOperatingincome(25%)Product&strategy(16.67%)Customers&stakeholders(16.67%)Culture&organizationalleadership(16.66%)Financial/formulaic(50%)Qualitative(50%)Commercialcloudrevenue(34%)Commercialcloudsubscribers(33%)Windows10monthlyactivedevices(11%)Surfacegrossmargin(11%)Consumerpost-salesmonetizationgrossmargin(11%)RelativeTSRmultiplieristriggeredonlyifMicrosoft’sTSRispositiveandabovethe60thpercentileoftheS&P500.NEOpaymix7.6%36.6%36.6%19.2%FY17cashincentiveFY17PSASalaryStockawardsCashincentivePerformancestockawardsOverhalfofMicrosoft’stargetpayisperformance-basedandalmostthree-fourthsisequity-basedFiscalyear2017compensationstructure MICROSOFT CORPORATION