2018 Guide to Effective Proxies

2.17.10 Peer groups | 471 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 In assessing our fiscal year 2017 executive compensation design, we considered pay practices at the largest technology and general industry companies in terms of market capitalization, revenue, and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) that were comparable to Microsoft. We selected this peer group because we believe these companies are led by executives with similarly complex roles and responsibilities. We also screened these companies to ensure they had a significant presence outside the United States, and excluded companies in the financial services sector because of the different regulatory environment in which they operate. For fiscal year 2017, this compensation peer group comprised these companies. Peer group used for fiscal year 2017 pay analysis Technology General industry • Alphabet • Amazon • Apple • Cisco Systems • Facebook • Hewlett-Packard • IBM • Intel • Oracle • Qualcomm • AT&T • Chevron • Coca-Cola • Comcast • ExxonMobil • General Electric • Johnson & Johnson • Merck • PepsiCo • Pfizer • Procter & Gamble • Verizon • Wal-Mart • Walt Disney In March 2016, when we determined the compensation peer group for fiscal year 2017, Microsoft was significantly larger than the median of these companies based on the three primary screening criteria. 0% 20% 40% 60% 67th Percentile 73rd Percentile 94th Percentile 80% 100% Market Cap Revenue EBITDA = Microsoft’s position Market capitalization, revenue, and EBITDA – Microsoft’s position relative to fiscal year 2017 peer companies Technology labor market Our businesses operate in very dynamic environments. The technology labor market is hyper-competitive with demand growing faster than the supply of technical talent, resulting in significant increases in compensation at all employee levels at the companies with whom we compete for talent. The same conditions exist in the market for executive level talent that can provide innovative leadership while managing at a global scale across several complex businesses. We expect these trends to continue and we expect to continue to adjust our approach to executive compensation to respond to market conditions. Scope of executive roles Our executive officers must perform demanding roles leading large global organizations, and overseeing complex and interdependent strategic initiatives. Often, our roles involve greater scope and complexity than similar positions at the companies in the compensation peer group. Establishing compensation opportunities In September 2016, Mr. Nadella recommended to the Compensation Committee fiscal year 2017 total target annual compensation opportunities for each of the other executive officers. In making these recommendations, he considered an array of information that, depending on the executive officer, included: • Role and responsibilities • Market data from our compensation peer group and other competitive market information reflecting the scale and scope of his or her role. For this purpose, the compensation peer group was tailored to comprise companies that represent the function the executive officer oversees. • The relationship of annual target compensation among internal peers • Information about the market for executive talent gained through monitoring external market pay practices, our experience recruiting for executive positions at Microsoft, and efforts by others to recruit our executive officers 2017 PROXY STATEMENT 45 MICROSOFT CORPORATION