In this article, we cover how compensation at Microsoft works and how you can maximize your benefits. Whether you’re a long-time employee wondering if you’re taking advantage of all the financial opportunities available to you or a new hire just trying to figure out how it all works—we’ve got you covered.
Like any major corporation, Microsoft offers a host of compensation programs and benefits to its employees. And while these benefits can be quite valuable, in most cases, they do require a fair amount of time, planning, and intentionality to take advantage of them and incorporate them into your overall financial strategy.
At Cordant, over our decades of experience working with Tech professionals, we’ve built expertise on the various industry benefits plans and how our clients can take advantage of them, which we’ll get to below. But, if you need any help, you can schedule a free consultation here.
In this article, we’ll group your benefits at Microsoft into the following categories:
- Compensation: Salary, Bonus, and RSUs
- Savings Opportunities: 401(k), the Mega Backdoor Roth 401(k), ESPP, and Deferred Compensation
- Insurance & Health Benefits
- Home & Family Benefits
- Other Benefits
Let’s dive in.
Compensation at Microsoft
Your compensation at Microsoft consists of a salary, annual bonus, and RSUs.
Like any company, your base salary at Microsoft is determined by your role and experience. Common roles at Microsoft are Software Engineer, Product Manager, Solution Architect, Data Scientist, Software Engineering Manager, and many others. Within these roles, Levels are used to measure capability and experience.
For example, in the Software Engineer role, an entry-level employee may come in as a Level 59 and, over the course of their career, progress to a Principle SDE (Software Development Engineer) at Level 67 where they are now eligible for Deferred Compensation (discussed later in the article).
As you increase in grade level (and total compensation), the variable component of your compensation (bonus and RSU income) becomes a greater percentage of your total compensation.
For example, base salary makes up around 70% of total compensation for the typical Level 59 Software Engineer versus less than 50% for a Level 67 Principle SDE. See the chart below.
Planning opportunities with salary: Contribute to your 401(k), HSA, and (for those Level 67+) Deferred Compensation accounts to reduce your taxes today. Fund your ESPP account.
Bonuses are paid annually in September at Microsoft and typically range from 0-40% of your base pay. The higher your level, the higher percentage of your total compensation this cash bonus will represent. For example, for a Level 59 Software Engineer, the cash bonus might add 15% to their base salary, while at Level 67, it might add up to 30%.
Stock compensation at Microsoft is offered via RSUs. Restricted Stock Units vest over time and are taxed as income
at vesting. Think of them as a cash bonus with upside tied to the stock performance of your employer. (For more, see our post on RSUs for Tech Professionals).
At Microsoft, annual stock awards are given out each August and vest over five years (20% each year). Vesting happens quarterly in February, May, August, and November.
On-hire stock awards typically vest over four years (25% per year), with the first vesting coming one year after your hire date.
Like with bonus income, the higher the level, the higher percentage of your total compensation RSUs will make up. For someone at Level 59, stock compensation in the form of RSUs may be 25% on top of their base salary vs. 80% at Level 67.
Because of this quarterly vesting and new shares award each year, Microsoft employees with tenure at the company will have significant taxable income from RSUs each year and the potential, if the shares are sold, to have significant additional cash flow.
This additional cash flow can, for savvy Microsoft employees, be combined with other benefits (like the Mega Backdoor Roth 401k) to maximize your financial wealth.
Planning opportunities with RSUs: Use RSU income to maximize contributions to other benefits programs. Incorporate tax planning with your RSU vesting schedule to minimize taxes.
Savings Opportunities at Microsoft
Like most companies, the 401(k) at Microsoft is one of the first accounts you should think about saving money into. Microsoft matches 50% of your contributions up to the annual IRS limit of $19,500 for 2021 (or $26,000 for those over 50, thanks to the additional $6,500 catch-up contribution). This means that for those contributing the maximum of $19,500, Microsoft would contribute another $9,750 towards your retirement savings.
For a Level 59 Software Engineer at Microsoft, this full matching contribution from Microsoft is like an 8% raise!
Planning opportunities with the 401k: Maximize your contributions to get the maximum employer match. If needed, use cash flow from RSUs to max out your 401(k).
Mega Backdoor Roth 401(k)
The Mega Backdoor Roth 401(k) is a fantastic way to boost your retirement savings. Here’s how it works at Microsoft.
For an employee under 50, the maximum pre-tax 401(k) contribution is $19,500, which Microsoft would then match with its contribution of $9,750. But, the IRS allows total contributions into a 401(k)—both pre-tax and after-tax—of $58,000 in 2021.
This leaves a gap of $28,750 that can be filled with an after-tax contribution and then converted within the 401(k) to a Roth.
While you get no tax deduction today for these additional contributions, the power of the Roth account is that the money grows tax-deferred and is tax-free when you pull it out at retirement.
Planning Note: In some of the proposed tax changes currently in Congress for 2022, this Mega Backdoor Roth option is eliminated. 2021 could be your last chance to participate.
Microsoft’s ESPP (Employee Stock Purchase Plan) allows employees to contribute up to 15% of their salary towards the purchase of Microsoft shares. These shares are purchased through the ESPP program at a 10% discount to market prices.
As we’ve written before, if your employer offers an ESPP, you should jump at the opportunity to participate—it really is free money. In this case, you can purchase $100 worth of stock for $90 and immediately sell it at the end of the offering period for a tidy profit of 11%—way more than you can earn on a bank account these days—making this a good choice to fund short term savings goals.
For more about how ESPPs work, how they are taxed, and how to incorporate them into your overall wealth-building strategy, see our article Employee Stock Purchase Plan (ESPP): The 5 Things You Need to Know.
Planning opportunities with the ESPP: Enroll! Get the 10% bonus on your savings.
Deferred Compensation at Microsoft is available for employees at Level 67 and higher.
These plans come with a couple of tax benefits. First, contributions in the plan get invested and grow tax-deferred. And second, you can defer income today to years in the future when you may potentially be in a lower tax bracket.
At Microsoft, eligible employees can defer up to 75% of their base salary and 100% of the bonus into the deferred compensation program. The window for making salary deferral contribution elections for the following year is typically November.
Deferral elections for the next fiscal year’s annual bonus are made in May for the bonus period that runs from 7/1-6/30. These contributions are credited to your Microsoft Deferred Compensation account on 9/15 for the prior period.
The money is distributed per a pre-elected distribution schedule, typically either a set number of years (e.g., 10 years, 15 years, etc.), at retirement or upon leaving the company.
With all deferred compensation plans, it’s important to keep in mind that they are unsecured liabilities and subject to the credit risk of the company. Care should be made to balance the tax benefits versus your total exposure to Microsoft via stock, salary, and deferred compensation, the percentage of your net worth in the plan, and the credit health of Microsoft.
(For more on the tradeoffs of this plan, see this post. While specific to Intel, it walks through the types of risks you should consider when making your deferred compensation election.)
Insurance & Health Benefits at Microsoft
The HSA account, the only triple tax-advantaged account (Pre-tax, Tax-Deferred Growth, and Tax-Free withdrawals), is available for Microsoft employees in a High-Deductible health plan. Microsoft will contribute $1,000 per year to this account. The annual limits for 2021 on contributions in this account are $3,600 for an individual or $7,200 for a family (limits for 2022 are $3,650 and $7,300, respectively).
Health, Vision and Dental Insurance
Microsoft offers Health, Vision, and Dental insurance at no cost to the employee. Additionally, they offer the ability to participate in FSA and HSA programs for employees to set aside pre-tax dollars for medical expenses.
Microsoft carries life insurance, at no cost to the employee, at 2x your salary. Additional life insurance up to 10x your salary (not exceeding $2.5M) can be purchased. The premiums are aged-based, and while a health exam is typically not required for lower coverage amounts, it may be required at higher coverages. Additional coverage can also be purchased for spouses and children up to age 26.
Life insurance policies are not portable, meaning if you’re planning on leaving Microsoft, it would be best to have additional coverage elsewhere if needed.
Through the “Stay Fit” program, Microsoft will reimburse employees up to $1,200 per year in wellness-related expenses. In addition to the traditional gym membership, this program can be used to cover the costs of meditation, weight-loss programs, caregiver support, and financial advising (hey, that’s us!).
Home & Family Benefits at Microsoft
The relocation package at Microsoft can be offered at any level for employees moving more than 50 miles. While flexible per situation, the packages are typically structured one of two ways.
- Relocation Assistance (Reimbursement)
- Relocation allowance of $2-$5k to cover typical moving expenses like new deposits, changing addresses, etc.
- Moving costs
- Temporary housing (typically two months)
- Temporary Transportation
- Lump Sum
- Single cash payment to cover the expenses listed above
- Typically range from $12,000 for a cross country move to $25,000 for an international move
Additionally, Microsoft may cover housing-related costs such as house hunting and closing costs for homeowners. For renters, it covers the costs of breaking your old lease.
At Microsoft, birth mothers are entitled to 20 weeks of paid time away. All other new parents are entitled to 12 weeks of fully paid leave. This leave is included for adoption and foster parents as well. Leave can be split and must be used in the first year.
Microsoft reimburses up to 160 hours of childcare care expenses. The company has offered this benefit for a long time but substantially increased the hours it reimburses in 2019.
Adoption, Fertility, Immigration assistance
According to TechRepublic, “Starting in January 2018, [Microsoft] began offering assistance with fertility treatments; covered expenses include: Three fertility treatment cycles, genetic testing, and egg/embryo freezing and storage for up to four years.”
Additionally, “Microsoft offers adoption assistance up to $10,000 per child, and covers some surrogacy-related expenses.”
Four weeks paid family leave
According to Microsoft’s benefits page, Employees can take “four weeks of fully paid leave to care for an immediate family member with a serious health condition. You can also take up to an additional eight weeks of leave paid under the Microsoft’s voluntary Washington Paid Family Leave plan, for a total of 12 weeks of leave per leave year.”
Other Benefits at Microsoft
Charitable Donation Matching
If you’re charitably inclined, this is a benefit you don’t want to miss. Microsoft will match up to $15,000 annually for gifts of stock or cash to a charity of your choice. Additionally, Microsoft will donate $25 per hour worked by an employee at an eligible organization.
Planning opportunities with charitable donations: Donate low basis shares in order to reduce your capital gains taxes and get the Microsoft match.
Microsoft offers up to $10,000 annually to cover the cost of tuition, books, or fees at an accredited institution.
Maximize Your Microsoft Benefits and Accelerate Your Financial Progress
As financial advisors, our job at Cordant is to accelerate our clients’ progress toward their definition of financial success.
And optimizing the benefits available to you at Microsoft is one way to do just that.
Whether you work with an advisor or not, make sure you take full advantage of the compensation, savings, health, charitable, and other benefits available to you.
And, if we can be of any help, please get in touch. We’ll start with a short 15-minute call to talk about your situation, goals, and concerns to see if it merits discussing further how we can help.
This information is supplied from sources we believe to be reliable, however, this information is subject to change without notice and we cannot guarantee its accuracy. Please reach out to your benefits department for the most up-to-date information. Cordant is not affiliated with Microsoft.