Meanwhile, Company founder Bill Gates is leaving the chairman role for a new role as technology adviser.
Nadella will become only the third leader in the software giant's 38-year history, after Gates and Ballmer. Board member John Thompson will serve as Microsoft's new chairman.
Nadella, 46, has worked at Microsoft for 22 years and has been an executive in some of the company's fastest-growing and most profitable businesses, including its Office and server and tools business.
"Satya is a proven leader with hard-core engineering skills, business vision and the ability to bring people together," Gates said in a statement. "His vision for how technology will be used and experienced around the world is exactly what Microsoft needs as the company enters its next chapter of expanded product innovation and growth."