Amid declining revenues, Microsoft is slashing the salaries and incentives for its top executives, including CEO Steve Ballmer, for fiscal year 2009. The decision came after Microsoft reported its first-ever drop in annual revenue.

The was part of Microsoft's proxy statement filed late Monday. In it, Microsoft revealed that the fiscal year ending in June posted a three percent sales decline, with revenues totaling $58.4 billion. The company also said it reduced expenses by $3 billion compared to its original fiscal 2009 plan.

Although Microsoft's compensation committee thinks Ballmer is underpaid, the software giant nonetheless cut his salary from $1.35 million to $1.28 million. Ballmer still holds 4.8 percent of the company's common shares. Only Chairman Bill Gates owns more among company officers.

"Steve has such a large stock position in the company. He is clearly tied to the company's future in any case. Given the company's stock performance, I've often wondered if he's isn't losing more money in any given year than he's made when the stocks are down," said Rob Enderle, principal analyst at the Enderle Group. "A number of times that's probably been the case, especially over this last year when the market collapsed."

Walking in HP's Shoes

Ballmer isn't alone. Hewlett-Packard CEO Mark Hurd reduced his own base salary by 20 percent earlier this year. HP also cut executive pay by 10 to 15 percent across the board, while most employees took a five percent pay cut. Executive pay cuts should be a more common practice, Enderle said.

"It's more often the case that a CEO will go in for a raise wanting credit for the cuts they've made. That tends to distance the CEO from the employees and makes it even tougher for the company to recover," Enderle said. "It tends to work out much better when you have a CEO who is willing to showcase that they will take cuts along with the employees so you don't have this appearance of CEO royalty, the idea that the CEO's compensation has nothing to do with the company's performance."

Ballmer is worth about $10 billion, so the pay cuts won't impact his lifestyle or his future. Industry watchers said the pay cut is more symbolic than anything; a symbol of a willingness to share the pain with employees. Although taking a pay cut is an embarrassment for a CEO, Enderle said, Ballmer is giving the right perception to the market.

Ballmer Slams Apple

Meanwhile, Ballmer seems willing to let Apple in on the pain. In an interview with TechCrunch, Baller said high prices for Macs have caused some consumers to look elsewhere while the low-cost Windows 7 is more suitable for the recessionary climate.

"We're gaining share. Apple is expensive," Ballmer said. "And in a tough economic environment, people get it. Their model is, by definition, expensive. And we've actually held or maybe even gained just a tiny bit of share relative to the Mac in the last 12 months. And it's not really (Mac OS X) Snow Leopard. It's really Windows PCs versus Mac."