This excerpt taken from the MSFT DEF 14A filed Sep 29, 2008.
Assessing Performance and Determining Compensation Other Named Executive Officers
Target Compensation. At the beginning of fiscal year 2008, the Compensation Committee approved the target total direct compensation (consisting of base salary, target annual cash bonus opportunity, and target equity awards) for our named executive officers (with the exception of Mr. Ballmer, whose compensation is determined as described above), based on the following factors:
Actual Compensation. Following the end of fiscal year 2008, the Compensation Committee approved base salary adjustments for our named executive officers, as well as the amount of each officers annual cash bonus for the just-completed fiscal year, and the amount of his discretionary restricted stock unit awards (called Performance Pool SPSAs) after considering:
As part of the compensation-setting process following fiscal year 2008, the Compensation Committee also reviewed tally sheets prepared by our Human Resources division that set forth each named executive officers historical earnings, the value of his outstanding and unvested equity awards, his current holdings of Microsoft common stock, any perquisites and benefits, and, if applicable, any potential severance payments and benefits.