Leaked Microsoft memo warns managers not to discuss its salary freeze during employee reviews, but to tie ‘rewards’ to an employee’s own ‘impact’

• Microsoft is notifying employees this month about how their performance affects their paychecks.
• Notably, the company froze salaries this year and cut its budget for bonuses and stock awards.
• An internal guide tells managers how to answer when employees ask how those changes impact pay.

Typically, Microsoft notifies employees if they have received a raise in August. However, after freezing salaries and reducing budgets for bonuses and stock awards this year, the company instructed managers not to discuss the company’s budget with employees during performance reviews.

Microsoft’s annual review cycle typically begins in April with performance reviews, followed by notifications about how performance affects compensation in mid-August and a payout on September 15. According to three Microsoft employees who shared review and pay information with Insider, stock awards are accounting for a larger portion of their bonuses this year than usual.

In an email seen by Insider, Microsoft CEO Satya Nadella informed employees in May that the company will not raise full-time employee salaries this year and will reduce its budget for bonuses and stock awards.

The same day, Microsoft Chief People Officer Kathleen Hogan instructed managers to give fewer employees “exceptional rewards,” which equates to a high performance rating that leads to higher pay and bonuses. “More will need to be at the middle of the range,” Hogan explained in an email.

And now, an Insider-viewed guide for managers conducting performance reviews instructs managers on how to respond when employees ask how budget cuts affect an individual’s pay.

“Given the decisions shared in Satya’s email,” the guide says, “it’s natural for employees to ask questions about budget.” “However, it is critical to focus discussions with direct reports on their impact for the previous fiscal year and directly link it to their rewards.”

Managers should not use budget cuts as a “explanation” for individual employee compensation decisions, but rather emphasize that the employee’s own “impact” determines “rewards.”

“Using budgets or other factors besides the employee’s impact as an explanation for an employee’s rewards will erode trust and confidence within your team,” the guide continues. “Remind everyone that each year presents a new opportunity for impact, and we raise our bar regardless of our budget.”