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The world's largest software company told employees on Thursday that it's giving them pay raises and changing the way it awards bonuses beginning this September.

Bonuses are getting bigger and will involve more cash compared to Microsoft stock, although stock allocations are also increasing.

Further, Microsoft changed its compensation structure, to make the review and reward process clearer.

The goal is to keep Microsoft competitive in hiring, according to a memo from Microsoft chief executive Steve Ballmer sent to staff and seen by The Reg. Ballmer said:

Through our history, we have been THE place people came when they wanted to make a difference in the world through software, hardware and services. This is as true today as it has been at any time in our history, and the changes we're rolling out today will help ensure Microsoft continues to be the place that top talent comes to change the world.

According to Ballmer a portion of stock award targets are being moved into employees' base salary, meaning more cash up front.

Funding for Microsoft's bonus and stock awards is increasing to deliver: "100 per cent or more of target bonus and stock awards to 80 per cent of our eligible employees." Ballmer said: "This is up from about 50% in prior years. The additional funding ensures our approach continues to support higher payouts to top performers."

Microsoft's old and rather complicated performance measurement system has been scrapped for something that uses a simple 1-5 relative performance rating. You can read more here from internal Microsoft blogger MiniMicrosoft.

The pay raises and increased cash bonuses come as Microsoft finds itself under growing pressure not just to compete against Google and Facebook for new engineering and product talent, but also to stop its current employees from joining them.

Microsoft has seen a slow and steady trickle of people depart for Google and Facebook and to others like Amazon and Juniper.

Staff have departed from engineering, marketing, product development, and advertising in the corporate division and from the Windows, Internet Explorer, online, Xbox, and - shockingly, given its success - Kinect groups. Employees have gone over to the offices of rivals in Microsoft's back yard of Washington State as well as in other geographies.

Microsoft has been consistently knocked for no longer being the place for innovation or excitement in tech.

But the company has lagged behind where it matters most to employees: salary and compensation.

Microsoft ranks third behind Google and Facebook, according to Glassdoor.com, when it comes to average salary for a software engineer. At Microsoft, the average is $86,929, compared with $97,727 at Google and $108,909 at Facebook. A Microsoft product manager earns an average salary of $101,115, compared to $116,134 at Google and $125,000 at Facebook.

Significantly, the new system sees Microsoft shift compensation away from stock. Microsoft shares are not a growth commodity, and in the last five years, prices have ranged between $15 and $37. While Google's stock growth curve has slowed, shares have traded between $262 and $714. Facebook is not a listed company.

Making it harder for Microsoft is the fact Google and Facebook are locked in a salary and compensation arms race against each other. Google in late 2010 awarded a 10 per cent pay raise to all staff. According to reports, it has also offered millions of dollars in restricted stock or pay raises to stop staff going to Facebook. Sometimes the offers have worked, others not. ®

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