Introduction
Organizational structure and design is important to every organization. This is because it defines the reporting structure and the job description and this way every employee becomes aware of their roles. Additionally, compensation for work done is necessary in order to motivate the employees since an organization cannot exist without them. However, compensation varies with the ranks whereby the executives receive higher remuneration packages than the employees.
This can be demotivating to the employees because they do majority of the work. A company’s management is also expected to represent the interest of its stockholders (creditors and shareholders). Therefore, if the management (agent) uses its position to pursue its personal interests to the disadvantage of the stockholders (principal) it leads to agency problem. The aim of this paper is to analyze Microsoft Corporation, the agency problems facing the company, its job design and compensation packages to its executives and the employees.
Essay Body
Microsoft Corporation is one of America’s most profitable companies. It was started in 1975 by Paul Allen and Bill Gates. It is the global leader in providing software, services and solutions which assist people and enterprises in achieving their goals. Microsoft’s headquarters are located in RedMond, Washington in the United States. According to Fortune 500 Microsoft is among America’s top 50 largest companies in profits, revenue and shareholders’ equity returns.
Currently, the company’s net earnings are at $23,150m and its revenues are $69,943m. Some Microsoft’s products are Microsoft Office, Xbox, Xbox 360 video gaming tools and Microsoft Windows. The company also runs Windows Operating Systems (Microsoft Investor Relations, 2011). Its mission is to assist people and businesses in the entire globe in achieving their potential. Additionally, its values are honesty, integrity, mutual respect and personal excellence among others. In addition, Microsoft takes passion in technological innovation and it is concerned about the welfare of its stakeholders by striving for the best quality (About Microsoft, 2012).
Microsoft has over 92,000 employees in over 25 countries. In order to manage its operations the company has divisional/group organizational structure whereby every division or product group specializes in particular products. Additionally, every division has research and development, customer relations, Microsoft business, entertainment and sales staff. Every division is represented by one executive who is responsible to the company’s president (Wills, 2010, p. 1). The diagram below is an example of Microsoft’s organizational chart.
Agency problem within the company, its causesand how it might be better controlled:
Agency problem is also known as principal-agent problem. It refers to conflict of interest that arises between a company’s management and its stockholders. It can occur if the management and the stockholders have differing ideas. The stockholders are the principals of the company. They include the creditors and the shareholders while the management is the agent. The principals own the company but they employ the management to run and manage the company on their behalf. Therefore, the agent is expected to represent their interests.
An example of agency problem is adverse selection. This conflict arises when the principal is not sure if the agent is capable of doing the work for which he is expected to do. Conflict of interest exists in almost every organization (Agency Problem: Definition, 2011). More specifically, Microsoft Corporation has been accused of more than one agency problems. For example, the company was involved in an agency conflict with Sun Microsystems. Microsoft had negotiated with Sun in order to be allowed to use the company’s Java technology. Java’s success was mainly attributable to its flexible programs which could run on any operating system.
Therefore, Microsoft signed an agreement promising to develop and sell its own Java version but it would keep it portable. However, some days after signing the agreement Microsoft introduced a Java version which was incomparable with Sun’s. Microsoft’s Java version was only running on computers that used Windows operating system. Conflict arose between the two companies because Sun Microsystems (Principal) felt that Microsoft Corporation (agent) did not carry out the business they were expected to. Therefore, Microsoft’s management preferred to take care of its own interests to the disadvantage of Sun (Stephens, 2002).
This agency problem could have been caused by Microsoft’s strategy to dominate the software development market by copying the original non- Microsoft programs. Additionally, Microsoft is well known for deliberate use infringement and litigation of its competitor’s patent and ownership rights as an expansion strategy. This is because it has been involved in similar other cases which make it clear that litigation and betrayal have been the company’s way of beating competition. Unfortunately, it might be impossible to entirely eliminate agency problem. This is because the costs for doing so overshadowthe benefits.
However some control measures can be adopted. For example, Microsoft’s managers can be motivated through incentives so that they can act in accordance to the stockholders’ interests. Some incentives may include performance- based compensation and threats of either takeovers or firing. Additionally, a company can employ watchdog bodies or tough screening procedures. Law suits are also optional especially against Microsoft because they are legal. Additionally, through a strong court case it is possible for the affected stockholders to receive compensation for damages or loss of business incurred from infringement or litigation (Stephens, 2002).
Job dimensions of the company;if the current design is appropriate for the company; suggestions for improving the job design and if the organization is effective:
A job refers to specific tasks carried out as the routine of a person’s occupation at a certain price or compensation. Job can be part-time or full-time in nature. On the other hand job design or dimension is the way in which a group of tasks are organized. It also refers to the job specification, methodology and relationship between various jobs which are aimed at achieving an organization’s and an employee’s goals.Some of organizational goals of job design are efficiency, quality and productivity while the employee’s goals are contentment, motivation and personal growth (Griffin & McMahan, 1993, p. 2).
Microsoft’s job design is grouped by profession, geography and business division/ segments. The company uses job attributes approach, motivational approach and the perceptual-motor approach in its job design. The job attributes approach elaborates the required qualifications for a given job. The motivational approach requires that the job applicants possess certain skills and requirements while the perceptual-motor approach requires an employee to have technical skills in order to be able to interact with the company’s machinery (Griffin & McMahan, 1993, p. 4-9).
The current job design is not appropriate for the company. This is because it does not take in to account the human factor such as physical incapacity and gender balance. In order to improve this issue Microsoft should add more groupings in its job design. As a result gender discrimination can be reduced as well as discrimination against the physically challenged applicants. This type of integrated design has been very successful in NGOs and it is also possible that it can work for Microsoft.Therefore, the job design that the company is currently using is not effective because it concentrates mostly on organizational goals while the goals of the employee are merely represented. The table below is an example of a 3 by 7 job design matrix that Microsoft can incorporate.
Compensation package for executives and employees within Microsoft; if it is effective and any suggestions for improving the compensation package:
Compensation packages are essential in business organization. Landlords expect rent returns and entrepreneurs expect profit from their investments. Similarly, the labor force expectsa fair compensation package in form of salaries or wages from the business process. However, the executives have higher basic pay than the other employees. This is because they have more skills, experience and the title of their position also deserves high pay. Effective and fair compensation packages for both executives and the employees should be “internally equitable, externally competitive, affordable/cost effective, understandable, legal and appropriate for both the organization and the workforce” (Greene, 2010, p. 1).
Effective compensation package should also be based on merit (the employee’s role and how good their job is), personality (value that the employee adds to the organization) and results (Greene, 2010, p. 1). As from 2009 Microsoft’s executives have incentive plans which enable the Compensation Committee to put in place award programs for a given performance period. Therefore, the maximum compensation for an executive officer is a percentage of a pool of incentives for a specific performance period such as a fiscal year. The compensation package to one executive officer per fiscal year should be a maximum of $20m and it can be in form of stock awards or cash (Punk, 2008, p. 1).
This incentive is effective because it is merit based. However, on the other hand it is not cost effective. A $20m salary package per executive head means a lot of money outflow from the company.For example, in the fiscal year ended 2010, Microsoft’s CEO Steve Ballmer received $1.34m in compensation while Kevin Turner, a top executive received $10.45m (Eaton, 2010, p. 1). On the other hand Microsoft’s employees are compensated less than half of what the executives receive. For example, the annual salaries for managers range from $720,000 to $2.34m.
This shows that there is a very wide gap between the compensation packages for the executives and the employees. This is not effective considering that it is the employees who do most of the work as compared to the executives (Microsoft Salaries, 2012). Therefore, in Microsoft merit and results may not apply in compensation criteria.As a result this can demotivate the employees leading to poor performance for the company. Additionally, some employees can resign in pursuit of better remuneration making the company to lose talented and skilled staff.
In order to improve the compensation package, the Compensation Committee should compensate all the employees according to merit, results, skills and experience. Therefore, the employees should also receive bonuses and incentives such as stock options for good performance. This can motivate them and improve performance. On the other hand, the executive incentives such as stock options should be reduced because they are currently too high and they are affecting the company’s performance. The table below shows the compensation packages for the various executives in Microsoft for the fiscal year 2008 to 2010.
The table below shows compensation packages for some employees in Microsoft as at June 15, 2012.
Conclusion
Microsoft Corporation is an international company with high revenues and profits. It is also ranked among the top 50 largest companies in the Fortune 500. It specializes in software applications and services. Although it has a good reputation, it also faces various challenges. One of the major challenges is litigation or illegal use of its competitors’ ideas and products for its personal gain. This refers to agency problem which arises when a company misrepresents its stockholders’ interests.
Additionally, the company has an ineffective job design which can encourage gender discrimination and discrimination against physically challenged people. Microsoft’s compensation structure is discouraging in nature since there is a very wide gap between the executives and the employees. However, there are possible ways of solving these problems including law suits for agency problems, a 3 by 7 job design matrix, reduced stock option incentive for executives and increased remuneration for the employees. If these issues are solved as recommended, then Microsoft Corporation, its employees and its stockholders can achieve their desired goals.
References
About Microsoft. (2012). Web.
Agency Problem: Definition. (2011). Web.
Eaton, N. (2010). Microsoft executives’ pay and performance during FY2010. Web.
Greene, R. (2010). Effectively Managing Base Pay: Strategies for success. Web.
Griffin, R., & McMahan, G. (1993).Job Design: A Contemporary Review and Future Prospects. Web.
Microsoft Investor Relations.(2011). Web.
Microsoft Salaries. (2012). Web.
Punk, W. (2008).Mini- Microsoft: Compensatory Arrangements of Certain (Microsoft) Officers. Web.
Stephens, S. (2002). An Agency Problem of United States Vs. Microsoft. International Business & Economics Research Journal, 1(4), 15- 28.
Wills, M. (2010).Microsoft’s Organization and Structure. Web.