Country Club No More: Inside Microsoft's Move To Cull Staff On Performance

Microsoft; Getty Images; Chelsea Jia Feng/BI

• Microsoft cut nearly 2,000 employees deemed low performers this year.
• The cuts come with the company said to be reevaluating its performance review process.
• Microsoft was once known to be tough in reviews, but it took a softer stance under Satya Nadella.

In 2023, a Microsoft employee asked to take on a lighter workload when his wife was found to have terminal cancer.

His managers were supportive, and they appeared happy with his performance during his wife's illness as recently as late 2024, when they told him to expect 120% of his bonus.

Then, on January 22, the employee said, an HR representative unexpectedly joined his weekly manager meeting. The employee was fired without severance and was told his health insurance would expire that night.

The employee's wife had to skip chemotherapy treatments for a month after.

"I'm still shocked," he told Business Insider in a recent interview. "Shocked and angry. I did everything right."

The Microsoft employee asked not to be identified to protect future career prospects. BI has verified his identity and confirmed details of his performance, his termination, and his wife's illness through documentation.

A Microsoft spokesperson, Frank Shaw, said performance-based terminations rarely come as a surprise to employees and people could elect to have COBRA coverage.

This person is one of nearly 2,000 fired by Microsoft in January and February in a culling of those deemed low performers, according to a person familiar with the cuts.

This kind of performance-based mass cut is a shift for the tech giant, which continues to review the approach. Managers spent months evaluating employees all the way up to the executive level as the company considers changes to its performance review and management process, several people with knowledge of the plans said.

"We aspire to have a high-performance culture and want to make sure managers have the ability to drive that and that expectations are clear," Shaw said, adding that the company wasn't trying to design a tougher system, but one that removes ambiguity, provides clarity and flexibility, and allows managers and teams to move with speed.

A new way to evaluate employees

Leon Neal/Getty Images

Microsoft's new approach to performance management is shaping up to be one of the biggest changes to the company's management strategy since Satya Nadella became CEO more than a decade ago.

Before he arrived in 2014, Microsoft had a reputation for a cutthroat performance-review system, at least in a tech industry that often mollycoddled talented employees. Nadella softened that considerably.

Microsoft once had a reputation for a "country club" culture, as Amazon's founder, Jeff Bezos, called it, a place employees would go after they were done working hard in their careers and wanted to coast before retirement.

Now, some leaders worry the company has gotten too soft, making it difficult to shed underperformers, according to the people familiar with Microsoft's plans.

The company is looking to new external leaders, such as the former Google executive Mustafa Suleyman and a former Meta engineering chief, Jay Parikh, along with existing executives like the company's senior leadership team and LinkedIn CEO Ryan Roslansky, to help design a new way to evaluate employees, these people said.

Microsoft has had an incredibly successful decade, becoming a leading cloud provider and AI player. It's worth about $3 trillion, making the software giant the third-largest company by that measure. The stock has stagnated over the past year, however, as questions mount about the company's Copilot technology, and as AI competition intensifies.

The broader tech industry is facing other challenges, and Microsoft is not immune. A decadelong hiring boom has fizzled as companies focus more on profit, and AI coding tools reduce competition for software engineering talent. Meta recently cut about 5% of its workforce to "raise the bar on performance management." Amazon is culling managers. Even Google is trimming jobs.

Microsoft's termination letter

Employees who were let go in Microsoft's recent round of performance cuts got termination letters explaining the abrupt exit.

"The reason(s) for the termination of your employment include your job performance has not met minimum performance standards and expectations for your position," said the letters, which BI viewed. "You are relieved of all job duties effective immediately and your access to Microsoft systems, accounts, and buildings will be removed effective today. You are not to perform any further work on behalf of Microsoft."

The letters mentioned severance but said medical, prescription, and dental benefits ended on the last day of employment. The letters also said Microsoft would consider past performance and termination if the person applied for other jobs at the company in the future.

"At Microsoft we focus on high performance talent," a company spokesperson told BI recently. "We are always working on helping people learn and grow. When people are not performing, we take the appropriate action."

'Right to fire'

Deena Merlen, a partner at Reavis Page Jump LLP, told BI her law firm had received more inquiries about performance-based layoffs as of late.

"Employers generally have the right to fire, just as an employee has the right to quit," she said. "As long as Microsoft's alleged performance-based reasons are not for some other, unlawful reason, Microsoft is within its rights to engage in these layoffs."

The company has no obligation to provide severance, but such agreements often come with a release of legal claims that can protect the company from lawsuits, Merlen added.

Stack ranking

Before 2014, Microsoft used a controversial system to evaluate employee performance. Called stack ranking, it forced managers to put employees on a curve and cut the lowest performers.

At Microsoft, that meant managers had to rank employees from 1 to 5, and someone always had to get a 5, the lowest score, no matter how well they or the team performed. Shaw, the Microsoft spokesperson, said that the system was especially problematic for small teams and that while terminating the lowest rung was not a companywide policy, it happened on some teams.

Microsoft

Stack ranking was unpopular internally and was seen as prioritizing individual work, pitting employees against one another and creating a barrier to collaboration. Developers and even entire organizations had a tendency to reject acceptable solutions to problems if they hadn't developed those solutions themselves, the company's chief people officer, Kathleen Hogan, previously told BI. There's even a famous cartoon depicting Microsoft's org chart as warring factions.

'Model, coach, care'

The company officially abandoned stack ranking just before Nadella took over as CEO in early 2014. He redesigned the company's performance-review system around the "growth mindset" concept. The idea is that skills are developed through hard work and that challenges and failures are opportunities to learn. This is counter to a "fixed mindset," which assumes talent is innate and struggles are a sign of failure.

Nadella and his new leadership team applied this growth mindset to a new framework called "model, coach, care," which called on managers to set a positive example for employees, help staffers adapt and learn, and invest in people's professional growth.

Instead of ranking employees from 1 to 5, Microsoft moved to a performance-review system that gives managers a simple payroll budget they could divide and dole out to employees based on performance.

Kevin Oakes, the CEO of the Institute for Corporate Productivity, has worked with Microsoft on implementing a growth mindset. He told BI this approach was a way to encourage top performers but noted that even companies like Microsoft need to cull their workforces to become leaner and higher performing.

"Any high-performing organization should make sure employees are performing at an acceptable level, and they should be weeding out people who are not performing at an acceptable level," he said. "Over time, you tend to get a little bloated as a big company where you've let hiring go unchecked in some areas and need to get back to a lean, efficient machine."

The ManageRewards slider

Stephen Brashear/Getty Images

Today, employees are evaluated on a scale from 0 to 200 called the "ManageRewards slider." The process begins with frontline managers, who evaluate an employee's impact and recommend where they think they should land on the slider. Then, a higher-level manager considers "differentiation" — i.e., making sure the team is distributed along the slider.

The middle of the range is 100, while 0, 60, and 80 are lower performers and 120, 140, and 200 are higher performers. Those ratings influence how much an employee receives in stock awards and cash bonuses. A score of "Impact 60," for example, generally gives employees 0% of their stock award and 30% of their maximum cash bonuses while the slightly higher rating of "Impact 80" gives them 60% of their normal stock award and 80% of their maximum bonus. Shaw, Microsoft's spokesperson, said 100 would be considered a good score and mean an employee had met all of their objectives.

In general, the company's senior leadership team gives managers a budget that allows for every employee on the team an average score of 109.

"So you want to pay someone impact 140 for doing an outstanding job? Find 3 people you're giving Impact 100 so it's affordable," one executive-level manager explained. "Keep this guy around. He'll be paying for everyone's bonuses."

The manager said they typically had paid top performers by finding a set of people who failed in the previous year and giving them all zero or reduced rewards. This person asked not to be identified discussing sensitive topics. "That's a bad manager," Shaw said. "You certainly can't give everybody high rewards," but you can give one person high rewards and the rest of the people around 100.

How Microsoft handles low performers

While low rewards can indicate a performance issue, Microsoft's actual system for managing out low performers is separate from this employee-rating process.

Generally, managers email an internal system called AskHR@ and request a consultation for performance concerns, and the manager will be matched with an internal consultant. More seasoned consultants are used for higher-level employees, or if the situation is difficult.

These consultants give written formal feedback to employees, saying they delivered "Less Impact than Expected" and start a three-month performance-management process.

Some managers can cut low performers who don't improve within about four months through this process. But sometimes Microsoft's HR department concludes that managers haven't done enough performance coaching, one manager said, meaning they have not generated enough documentation showing employees have been given the opportunity to improve and have repeatedly failed.

It can take two or three more 90-day programs before these employees are ousted. One high-level manager said the average time to exit a low performer was seven months from the time a manager notified HR about the situation, which often comes after sustained low performance.

"It takes too long to performance-manage folks out," one executive said.

These exits can be further delayed by leaves of absence. One of the Microsoft managers who talked to BI said employees sometimes shared tips on how to complicate the company's performance-improvement process.

One common suggestion: If your manager is working to fire you, go to a doctor and say you have certain symptoms, get a supporting letter, and secure health-related time off work. This can pause or reset aspects of the process, this person said.

Short-term paid disability typically covers 60 to 90 days away from work, and Microsoft's HR department can be reluctant to exit these employees for some time after that, the person said.

"For employees gaming the short-term disability policies, you can be talking 12 to 18 months to get to a point where HR is comfortable firing them," they added.

'One Year, One Reward'

In the US, a common refrain for the 0-to-200 performance reviews was, "One Year, One Reward," meaning employees are judged on a single year's performance.

The separation between rewards and the formal performance-management process gave flexibility to managers to "harvest the budget," as one manager said, in other words give lower ratings to relatively adequate performers so big rewards could be doled out to high performers. They could do this without much risk to the employment status of the adequate performers. Shaw, the Microsoft spokesperson, said this was not company policy.

Hogan, Microsoft's chief people officer, in an internal email in 2023 instructed managers to give fewer employees "exceptional rewards," meaning a high performance rating that leads to higher pay and bonuses. "More will need to be at the middle of the range," Hogan said in the email. Shaw, the spokesperson, said the email was specific to that year and that rewards changed annually based on factors like the economy and company performance. Changes to this year's rewards cycle won't be solidified until later in the year, he said.

"Microsoft just summarily terminated hundreds of employees who had year-over-year insufficient performance based on rewards, without a lengthy documentation and feedback process," one executive said, adding that this coming rewards season would be more difficult on managers, who would have to be more careful about doling out low rewards.

Shaw, the Microsoft spokesperson, confirmed that the decisions about whom to cut came from looking at rewards year over year but said the company still believed in "one year, one reward." Just because an employee gets high rewards one year, for example, doesn't mean they've earned it the next.

New leaders, new perspectives

As Microsoft evaluates its performance-review process, people familiar with the plans say the company is looking for perspectives from new leaders such as Suleyman, the former Google executive who is now Microsoft's CEO of AI, and Parikh, the former head of engineering at Meta who runs AI platforms at Microsoft. Shaw said that Suleyman and Parikh were just some of the people providing perspective and that Roslansky, the LinkedIn CEO, had also provided a lot of input.

"The company will have a much stronger point of view, like some of our competitors," one Microsoft executive said.

'Good attrition'

The company is making other changes to prioritize engineering talent and level out organizations, taking a page from Amazon.

Separate from its performance-management processes, Microsoft is starting to weigh how it can become leaner and more engineering-focused. The company measures what it calls "good attrition," which is reviewed at the executive level, the Microsoft executive said. That's reminiscent of Amazon's "unregretted attrition."

Right now there are no targets for this Microsoft metric. But the company is borrowing from Amazon in trying to increase the ratio of engineers working on projects. Amazon has something called the "Builder Ratio," which analyzes the ratio of software engineers to "non-builders," such as program managers and project managers. The goal is to try to keep organizations lean.

Charlie Bell, Microsoft's security boss who came from Amazon's cloud unit, has brought this metric to Microsoft. Microsoft tracks the "PM ratio" which is the ratio of product managers or program managers to engineers, and has increased targets in the current fiscal year. For example, Bell's security organization right now is around 5.5 engineers to one PM, and his goal is to reach 10:1, according to a person familiar with Bell's plans.

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