Online Extra: Reshaping Microsoft's HR Agenda

Microsoft CEO Steve Ballmer and human resources director Lisa Brummel discuss corporate culture changes at the software giant

Two years ago, with its stock price in a funk and the next version of its key product, Windows Vista, bogged down in development, morale at Microsoft (MSFT ) withered. The company needed a new director of human resources, and Chief Executive Steven Ballmer said the choice for the job was obvious: Lisa Brummel , the general manager running Microsoft's consumer productivity business.

Why Brummel, an executive who had no experience working in human resources? Because Microsoft's culture demanded it. Brummel, who joined the software giant in 1989, knew intimately how the company worked. She could relate to employees because she grew up professionally at Microsoft, a workplace unlike any other.

While Brummel was handpicked by Ballmer, she and the boss don't always see eye to eye. She had to convince Ballmer to overhaul the forced ranking system, the annual review process that annoyed employees but was prized by Ballmer. And she's contemplating offering workers free lunches, à la rival Google (GOOG ), even though Ballmer's a skeptic. The two executives recently sat down with BusinessWeek senior writer Michelle Conlin and Seattle bureau chief Jay Greene to discuss Brummel's tenure so far and talk about what's next. An edited transcript of their conversation follows.

What was morale like at Microsoft before Lisa took over human resources?

Ballmer: Look, I don't think the fundamentals have changed. I think we're doing a lot of things a lot better with Lisa at the helm. We have had the good fortune and the strength of having one of the most talented, motivated workforces imaginable, let alone on the face of the planet, but even imaginable. Over many, many years, we've put a lot of energy, time, and attention into building that as an asset. That's true of recruiting. That's true of retention. That's true in terms of work environment. That's true in terms of job selection.

So, cosmetics aside, were we doing a pretty good job? Yeah, I think we were doing a pretty good job. But we hadn't renewed our employee value proposition, if you will, since we became a big company. How do you know you're a big company? Answer: When everybody thinks you are. You're a small company when everybody thinks you are, including your employees. You're kind of an emerging company when everybody thinks you are. You're a larger company when everybody thinks you are.

Clearly something happened between 1999 and 2003. We went from being whatever we were to being viewed as a very big company, because governments and everybody else said these guys are a very big company. And then you have to say, O.K., if that's the perception, then you have to have a value proposition that's appropriate. And not only had we not renewed our value proposition, we had tried to make small tweaks in some of the trappings and form around that value proposition that were sort of inconsistent with where it was and where it needed to go. So Lisa had to, when she took over, clean that up.

Why did you think a non-HR person like Lisa would be the person to do this?

Ballmer: Well, we've had more non-HR people running our HR. That's a true statement historically. Neither good nor bad, just true. For a variety of reasons, I wanted to move fairly quickly on a change there. I said, "We can always go outside." But there's nothing quick about that. Inside we have some good people in our HR department. But I really wanted to get somebody who's going to just be a very strong leader and have great kind of empathy for the things that the company stands for and also for the need to change. It took all of about 35 seconds of brainstorming to say if we're not going to get an HR person internally or externally, we should get Lisa. There was not a second thought about that. She was the obvious choice. Now, I didn't know whether she'd be interested or not. I had to kind of go put the pinch on. But she has historically been one of our strongest people leaders, and most involved and thoughtful about the people and the HR agenda.

What was her mandate?

Ballmer: It was a couple or three things. First, we have to renew the employee value proposition. I don't think it was formulated that way, but I said there's a set of things that have to come together, and she agreed on that. There were a set of things on senior talent that we agreed on. I went to her whiteboard and we made a list together of a couple or three things on which we agreed, because she wanted to know what it would look like to be successful. It's kind of like most jobs when you take over. You inherit something of an agenda, either from your predecessor or from your boss, and then you go develop your own agenda as you actually get into the role.

She went on a listening tour to hear from employees. And one of the things she heard was frustration about Microsoft's forced ranking system. Did that resonate for you? Did that seem like something Microsoft needed to remake?

Ballmer: No.


Ballmer: Uh-uh.

It wasn't top of mind for you?

Ballmer: Uh-uh.

But were you averse to changing it?

Ballmer: Uh-huh.


Ballmer: And we didn't change everything, we changed some things. We still do rank. There are two things you can rank. You can tell people where they live. Are they amongst the bottom, middle, or top-of-the-stack rank of people who are in their peer group? And the other is you could force-rank. Was somebody's work in the last year A work, B work, or C work? We decided that we would not force-rank grades relative to how people did in the last year. If everybody actually deserved an A, let's give them all an A. If everybody deserves a C, let's give them all a C. So, we said, people's work stands for itself. So, that was force-ranked, and it is not force-ranked anymore.

But if we're picking baseball teams, we still want you to know if you are at the top, middle, or bottom of the draft order. We still pick, and that's got to be force-ranked or it has no meaning. So, we do the latter, and we don't do the former anymore.

Did anything worry you about eliminating the forced grade ranking?

Ballmer: Well, Lisa got me comfortable with that. The fact is, I think it's very important to be very honest with people about where they stand. The thing she had to get me comfortable with was taking it off on one thing and changing it slightly and leaving it on in another, which still achieves the intended goal, which is to help people understand how they're viewed by their manager. I think that is helpful.

Brummel: He was transparent that there would always be a curve. He wasn't wedded to where it was in the model. So, we had a good discussion about how we needed to use the curve the right way, but not necessarily where it was in the model.

Lisa also heard from employees that they were unhappy with Microsoft's compensation system.

Ballmer: The good news and the most important news was we were paying people well. Whew, don't need to change the cost structure. The worst news is we're not getting full credit with our employees for what we're paying them, so we ought to put it in a form that they'll like it more. If you're going to pay people 100 bucks, they ought to think they're getting 100 bucks of value, if that's what it's costing you. And so there were a set of changes essentially to change the form of compensation. I don't think we changed the average total compensation much at all.

Brummel: People wanted more opportunity for differentiation. They wanted the opportunity to have upside if they did some really good things in the company. We changed the system so that our great performers really could feel it, not incrementally, but really could get upside opportunity, which helped us in a market that has all kinds of different compensation plans. We tend to get targeted against one particular company, whoever is hottest in the market. But our compensation program has to reflect many different industries. We used the same compensation for a long time, and people weren't feeling it as much, so we did make a big change in the stock plan.

Ballmer: We actually used stock options for a long time. We hadn't used anything else for a long time. And so in a sense you could either say we hadn't renewed our value proposition or you could say we hadn't done the v.2 of our cost system when we moved from options to stock awards. We needed a v.2 on that that really jibed with the new employee value proposition.

Do you think some of the creature-comfort things that Lisa's introduced are really important?

Ballmer: I think they are very important symbolically about culture. Taking away the towels was also about culture, and putting back the towels was about culture. I mean, the truth is we didn't save enough money, and we didn't cost ourselves enough money at the reinstatement. With some of the creature comforts, they primarily set the tone about what you expect. We do have competitors now who have decided that creature comforts are the things to compete on.

But let me give you an example. If we went to our employee base and said, look, here's the good news. The good news is we're going to put in $2,000 a year more creature comforts, but we're going to reduce our medical benefits in a way that saves us about $2,000. I don't think most people would take that trade. Nobody would put in our medical plan. So we added some creature-comfort stuff. But you can get a lot Guccier than we are. I don't think culturally that sets the right tone either.

Two years into this, what do you think of the job Lisa's done?

Ballmer: Part of the reason why I wanted Lisa in this role, and part of the reason why I think it's worked so well is we basically love the historical value proposition, and the culture, and what it can bring. The question isn't what model and what culture. It's how to continue to achieve that in a renewed and updated way, given that we can't sell the place the way we would have when Lisa joined us in whatever it was, 1989. That doesn't work. But the kinds of people we want, the kinds of people we want to promote and develop, a lot of that stuff is very similar.

So, how do we make sure everything we're doing from a people and human resources perspective lets us have that same kind of aggressive but respectful approach? If you're one of the most talented people in the world, this is the place for you. We're going to move forward. We're going to have broad ambition. We're going to do great things. If the place doesn't feel right, if we're not doing things right, they'll be shaking the place up. And yet, this will still be a place that people can say, "Boy, those guys really have a plan. They know what they're doing." This isn't going to happen just by accident. We're deliberate. We're intentional. We have a plan. We're prepared to invest behind the plan. We want to support innovation around a framework. We need the best and the brightest. We let people do their best work, and we take the hills, the innovation hills, the business hills that are out there in front of us.

What tells you so far that what Lisa is doing is working?

Ballmer: Our employee poll. Our employee poll tells us what 80,000 people are thinking. And what 80,000 people are thinking is very important. The truth is it's also important what 7,000 senior people in a trend-setting population think. And if you look at the trend-setting population, and you look at the population at large, I'd say not just so far, so good—so far, really good. We're on exactly the right track for employee value proposition renewal.

A lot of what we do with the employee value proposition is just win in the marketplace. People want to know they're with a winning team. So, when we launch products like Office 2007 and Windows Vista, that's a good day. When somebody's family Xbox has to come in for repair, that's a bad day. I tell Lisa still that in some senses our No. 1 HR strategy is our business strategy. When we're succeeding and winning and doing great stuff, success breeds success.

Lisa says that she's considering offering employees free lunch, and that [CFO] Chris Liddell is studying it. What's your opinion on that?

Brummel: I wasn't a big fan of it, but as part of looking at the marketplace, I think we have to. (Google offers its employees free meals.)

Ballmer: The first thing I would ask is what does it cost. My personal guess, though I don't know, is the cost will overwhelm any benefits. That's my belief. But we'll look at it. It's one of these things where if the market does it, I wouldn't necessarily do it. The next question I'd ask is if the market does it, let's ask people what it costs. And if we're willing to spend that much money, is that actually the best way to spend it? It's one of these things where people pretend like some things don't cost money and other things do. Everything costs money.

Microsoft has gold-plated health-care benefits and other great perks. Are you working on communicating that better to employees?

Brummel: We will try to educate the population on the investments we're making on their behalf, whether it's you get your own office, to your compensation, to your health benefits, to do you know you can get $1,500 back for a hybrid car. Whatever the case may be, we do need a better job of centralizing the information the employees should have about what they're getting here. But any time we focus on any one thing, the employees feel like they're being sold, and they don't like to feel like we're trying to sell them something.

You think Lisa's blog is a good idea?

Ballmer: As long as she's willing to really maintain it and write on it frequently, yes, I do. It's one of the problems with blogs in general from senior people. It can't be something that somebody else does for you, because people see that for what it is. And if you really are going to do it, then you've got to commit to being pretty regular. I won't blog ever. Some people can sit down and just write. Writing is not a natural skill for me. It takes me a long time to write, and I simply couldn't dedicate the amount of time it would take me, given my writing skills. I could say I speak very well. I could do a verbal blog every day, but it wouldn't be the same.

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