Microsoft boosts salaries to keep talent in hot job market

Facing a hiring crunch in California, Microsoft has boosted salaries of its Silicon Valley employees by 15 percent to stem turnover and increase staffing, the software giant confirmed. In other words, a Silicon Valley programmer receives 15 percent more in salary than one based in Redmond, Wash., for doing the same job. In the past, Microsoft has not offered regional cost-of-living raises.

Like a lot of big high-tech companies, Microsoft is finding it increasingly difficult and expensive to land and retain hot employees--particularly at its high-profile WebTV operation. In the past, Microsoft could afford to give workers lower salaries than competitors because the company's stock-option plan would more often than not compensate for any gap.

But now, those days of easy gains for Microsoft's stock may be gone because of uncertainty around the federal antitrust case and other factors. The skyrocketing valuation of stock from start-ups, of course, also makes life more difficult.

"We're having a candidate flow problem," Gabrielle Toledano, director of human resources for Microsoft's Silicon Valley operations, acknowledged. Those operations include WebTV.

According to people familiar with the situation, Microsoft has been facing growing disenchantment from some employees about the cost of living in Silicon Valley, particularly those at WebTV.

"It's no secret that Microsoft leverages stock equity more than straight salary. With the hungry market of today, they may not have kept up," said one recent departee who is now at a fast-growing, pre-IPO company.

In early February, Microsoft instituted a 15 percent pay raise for full-time employees living in Silicon Valley. In the past, Microsoft's practice was to pay salaries based on the cost of living in Redmond, which is the company's headquarters, no matter where the employee lived.

That isn't the only departure from the norm. The company has pulled out all the stops in transit stations, placing ads on the floor, steps and walls of San Francisco junctions in an attempt to get noticed in the hot high-technology job market.

In the San Francisco-San Jose region, Microsoft has employees in several locations, including Hotmail's operations and development group, some Windows and Mac software development teams, its bCentral small-business Web site team, and a small research group. Microsoft's total work force is normally about 1,400 regular employees, and about 1,100 to 1,200 are currently employed, according to Microsoft executives.

Arguably, the highest-profile operation is that of WebTV in Cupertino, with about 700 permanent employees. The hot job market, in combination with other factors, seems to have hit WebTV particularly hard, according to interviews conducted with a number of ex-WebTV employees and industry executives.

Microsoft's Toledano noted that the rate at which prospective employees are turning down offers from Microsoft has gone down in recent months, but to address the very competitive Bay Area market, the company has boosted pay for employees in the region and introduced other perks and programs to help keep employees in the fold.

Microsoft implemented the "geographic differential," as it is called, at the beginning of February, executives confirmed. About 596 employees at WebTV were affected by the change, according to an email obtained by CNET News.com that was sent by Bruce Leak, president of WebTV operations, to employees.

Still, the pay raise alone has not been enough to keep some employees, a situation faced by many high-technology firms in Silicon Valley.

"Even with the stock as valuable as that is, at its market value, it's still not compensating for the loss in annual salary that you would receive for a position in your field," said one former WebTV employee. Employees in advertising, for instance, have been able to find similar positions with a base salary double what Microsoft is offering in addition to stock options, he said.

At WebTV, a number of key employees who have been present from the inception of the company, including one of the principle designers of the WebTV operating system, have left within the last few months, according to various sources. Toledano noted that two of the company's three founders--Leak and Phil Goldman--are still on board, and the company's board of directors remains largely the same, too.

Still, turnover in the company's marketing group is nearly 100 percent since co-founder Steve Perlman's departure, and there is a significant shortage of engineers, which could affect the company's ability to continue to develop new products, sources said. As of March 3, there were 56 engineering positions advertised on WebTV's site, including managerial positions such as vice president of platform engineering. That number is up from February's listings based on postings on the site.

"It's hard to add a new feature, because even though one guy may be needed to develop the feature, you need ten guys testing that feature among the various services on the platform," said one former WebTV employee.

"People are playing the job lottery," said Michael Kelley, manager of retention strategies for Saratoga Institute. "Salary demand is being pushed up to the upper edges of what companies, especially start-ups, can afford. They can't keep paying (those) salaries, so they have to add things like stock options and hiring bonuses."

But with employees expecting options now, "there's almost a lottery madness. People are coming up to companies at jobs fairs asking if they are pre-IPO. They walk away if they aren't," he said.

"At Microsoft in general we're facing a tight labor market," said Chris Williams, Microsoft vice president of human resources. "We're feeling the strain both in Redmond, and frankly, around the world."

In relation to questions about problems retaining employees at WebTV specifically, Williams said, "As has happened with Amazon.com and Yahoo, (it probably takes a) different characteristic to be a founder of a small start-up than a manager of a very large project.

"Sometimes (for) a company's founders, like at WebTV, financial compensation has met its peak. They go do another start-up, and that's not uncommon. We try to point out all the good things about working at Microsoft, but for some, it's really no substitute for the thrill of the chase," said Williams. "You could get this exact same story from 10 to 15 other major firms in the Valley," he added.

Toledano cautions that any comparisons to companies similar to WebTV are hard to make, because many are either privately held or have only recently gone public, leaving most employees "locked" into their positions until at least a percentage of their stock options vest. After that lockup period ends, firms typically see up to 50 percent employee turnover, according to Toledano.

The industry's overall average is around 15 percent, based on figures from the Saratoga Institute, compared with Microsoft's stated figures of around 7.5 percent.

Ken Morse, CTO of PowerTV, a firm developing software for interactive TV services, has seen some WebTV people come on board with his firm in recent months. Morse thinks the departures are because of a combination of the expiration of "golden handcuff" agreements--agreements that give an employee stock in a company after a certain period of time--and because the people who started with the company don't feel comfortable in the new organizational structure.

"It's the equivalent of a start-up having growing pains; that happens whenever a company gets acquired," he said.

Once a company starts to lose its internal leaders, it doesn't matter if it has a lot of employees, Morse added.

"It's like they become a flock of sheep saying, 'Where are we going?' You can't afford to lose motivational leaders. It takes a long time to build that," he said.

Microsoft's Williams said his company is instituting programs to show how employees can move between different jobs within Microsoft, not just one of its units, to gain experience. In addition, the company is looking at turning each of its offices into "satellite offices" for other operations to address concerns about commuting in the area.

"We're doing everything we can to listen to everything employees are saying," Williams said. "We're not unlike other employers. We're struggling to find ways to attract the best and brightest, but we're having some success now."