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E*Trade pays exec the big bucks

Chief Executive Christos Cotsakos hits a compensation gold mine, even as the fortunes of his company and the online brokerage industry in general went south.

    E*Trade Financial Chief Executive Christos Cotsakos hit a compensation gold mine last year, even as the fortunes of his company and the online brokerage industry in general went south.

    E*Trade paid Cotsakos, who is also the company's chairman, $4.9 million in salary and bonus last year, compared with about $2 million in salary and bonus in the company's 2000 fiscal year, according to E*Trade's proxy statement, filed on Tuesday with the Securities and Exchange Commission.

    But that's a drop in the bucket compared to the other compensation he received. E*Trade forgave a $15 million loan to Cotsakos last year, gave him $15.2 million to pay the taxes related to the forgiveness of that loan, paid him $29 million worth of restricted stock and contributed more than $9 million toward a supplemental retirement plan for Cotsakos.

    Meanwhile, E*Trade posted a whopping loss last year of $241.5 million, or 73 cents per share. In the company's 2000 fiscal year, which ended on Sept. 30, 2000, E*Trade posted income of $19.1 million, or 6 cents per share. The company last year changed its fiscal year to coincide with the calendar year.

    Cotsakos' compensation is one of the most outrageous examples of executive pay, said pay critic Graef "Bud" Crystal.

    "This is so over the top that for once in my life I'm almost speechless," Crystal said.

    Cotsakos' compensation reflects the success the company has had under his leadership, said Connie Dotson, an E*Trade spokeswoman. Dotson noted that E*Trade has greatly increased its revenues, share price and accounts since Cotsakos took over the company in 1996.

    "I think he has made a unique singular contribution to the success and positioning of our company for the future," Dotson said.

    E*Trade said in its filing that Cotsakos' compensation reflects his importance to the company.

    "Ensuring Cotsakos' retention and assuring that his skills and abilities remain focused on the continued growth and leadership of the company is paramount to the company's long-term best interest," the company said in the filing.

    E*Trade has been following an ambitious plan to expand beyond its core online brokerage business. Over the past year, it has teamed with Ernst & Young to offer financial planning and advice, bought market maker Dempsey, opened an online mortgage service and began offering car loans.

    Although the diversification effort helped buoy E*Trade's business, the company was still hit by the stock market downturn and the subsequent falloff in online trading. The company's revenue from trading commissions fell 46 percent as trades plummeted. Overall, the company's revenue sank 7 percent last year.

    And the company's aggressive acquisition strategy came back to haunt E*Trade last year, as the company took a $202.8 million charge related to consolidating all of its disparate operations and closing offices.

    Bonus, restricted stock and more
    Despite this, Cotsakos' compensation surged in 2001. His base salary rose from $575,000 in fiscal year 2000 to $797,880 in 2001. Meanwhile, his bonus increased from $1.4 million in fiscal year 2000 to $4.1 million in 2001.

    E*Trade gave Cotsakos two separate grants of restricted stock last year. One grant of 666,666 shares has a set price of $7.42 per share and vests in equal portions quarterly over 18 months. The other grant, comprising 4 million shares with a price of $6.10 per share, vests equal portions annually over a 5-year period.

    In addition to the increased salary, bonus and restricted stock, Cotsakos also received more than $2.7 million from E*Trade to pay the taxes on the portion of his restricted stock that vested last year and for the contribution E*Trade made to his special retirement plan. E*Trade also paid $357,902 worth of premiums on Cotsakos' life insurance last year and the taxes Cotsakos would have had to pay for that benefit.

    In contrast to his bonanza last year, Cotsakos received no restricted stock in the company's two previous fiscal years. And instead of the huge loan forgiveness in 2001, he received less than $155,000 in reimbursements or employer retirement plan contributions in those two years.

    Dotson noted that the company previously disclosed the forgiveness of the loan and said that it was related to a settlement with Cotsakos. In exchange for the loan forgiveness, Cotsakos forfeited the right to receive relocation benefits in case control of the company changed hands. Shareholders benefited from the settlement, because the loan forgiveness and associated taxes were less than what E*Trade would have had to pay in relocation benefits and taxes if the company was acquired, Dotson said.

    But Crystal noted that the company paid out more than $30 million when it might not have had to pay anything at all.

    "They're exchanging a possibility for certainty. That's a great negotiating technique," he said.

    Cotsakos wasn't alone in seeing his compensation jump in 2001. R. Jarrett Lilien, the company's chief brokerage officer, saw his salary jump from $221,923 in fiscal year 2000 to $608,939 in 2001. E*Trade paid Lilien a bonus of $829,920 in 2001, versus $647,790 in fiscal year 2000, and restricted stock worth $724,190 last year, compared to none the year before.

    Jerry D. Gramaglia, E*Trade's president and chief customer operations officer, saw his salary nearly double, from $339,904 in fiscal year 2000 to $647,301 in 2001. While Gramaglia only got a marginal increase in his bonus, from $253,514 in fiscal year 2000 to $274,001 in 2001, E*Trade gave him $2.5 million worth of restricted stock last year, compared with none the year before.

    Leonard Purkis, the company's chief finance and administration officer, and Joshua Levine, the company's chief technology officer, also saw big increases in their salary and received big restricted stock grants last year.

    Standout income?
    But even among that largesse, Cotsakos' compensation stands out, Crystal said. E*Trade noted in its filing that it began negotiating a new compensation agreement with Cotsakos last year and the talks are ongoing.

    "We have a whole new negotiating strategy here. Give him everything before you negotiate a new employment agreement," Crystal said.

    Cotsakos' base salary is in the 58th percentile of "peer companies," E*Trade said in its filing. And his cash compensation, including his bonus, places him in the 62nd percentile of such companies, E*Trade said.

    But Crystal questioned what E*Trade means by "peer companies," noting that other brokerages dwarf E*Trade in terms of revenue and customers. And the statistics do not figure in the forgiveness of the loan and the restricted stock, he said.

    Crystal said he was at a loss to explain why E*Trade's board would reward Cotsakos so richly after the company performed so poorly last year.

    "What is the problem with these directors? Are they brain-dead?" he said. "Something's going on here. It's hard to believe that you have such a stupid group of people running a board of directors."

    Cotsakos is only the latest dot-com executive to receive criticism for his compensation. Last year, Priceline.com drew flak after it handed out big compensation to its executives in the wake of a corporate restructuring. Meanwhile, eBay executives have raised eyebrows by their extensive selling of company shares.