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Stock options a double-edged sword for Net CEOs

The recent market turmoil has cut deeply into Net CEOs' stock option gains, making it potentially more difficult for new-economy companies to attract top talent in the future.

CEOs of many Internet companies hauled in million of dollars worth of stock options last year, but the recent market turmoil has cut deeply into those gains--making it potentially more difficult for new-economy companies to attract top talent in the future.

Chief executives at Lycos and Yahoo were among the highest paid in the Net economy last year, receiving packages valued in excess of $60 million.

Including salary, bonus and options he received last year, Lycos CEO Robert Davis pocketed $68.6 million, ranking as the highest-paid executive of 45 publicly traded Internet companies in a survey by Executive Compensation Advisory Services (ECAS), an Alexandria, Va.-based research firm.

Yahoo chief Tim Koogle received a compensation package worth an estimated $60.5 million in 1999. His salary was a relatively modest $295,000--19 percent more than he received in 1998--but he also received some $60 million in options.

ECAS valued options by multiplying the number of options granted, the exercise price, and a fractional percentage based on Black-Scholes values, a widely used tool for valuing stock options.

Though 1999 was a banner year for many Net chiefs, 2000 has been a different story, as the shares in many Net companies have fallen from orbit. As a result, recruitment efforts could be seriously hampered.

Using share prices as of last December, the average Net CEO received $25 million last year in salary, bonus and options. To arrive at that figure, ECAS assumes that the shares increase at a modest 5 percent annually.

As a result of the steep drop in many stocks, however, the values of those packages have fallen 32 percent to about $17 million this year

"The only reason for people to leave the old economy is the opportunity to get rich and do new things," said Diane Posnak, a partner at Pearl Meyer & Partners, an executive compensation consultancy. "A lot of the executives have seen their compensation take a nosedive, but they knew that that was the name of the game, high risk for high rewards."

New- vs. old-economy money
ECAS' survey also highlights the vastly different pay packages used to lure top executives in the old and new economies. The average salary for the CEO of a public Internet retailer is $213,075, about one-fifth the $1.1 million average of a Fortune 100 company, according to the research.

"The value as an executive is getting in before the company goes public, because the annual compensation is not that great, at least compared to larger old-economy companies," said Eric Legg, a project manager at ECAS, a division of Drake, Beam, Morin.

For example, Meg Whitman, chief executive at online auctioneer eBay, was issued 7.2 million stock options in fiscal 1998 worth roughly $360 million at a share price of $50.

Bonuses also comprise a bigger portion of the total compensation package for CEOs of old-economy companies. Of 100 companies sampled from the Fortune 500, the average bonus was $1.5 million vs. $420,000 for executives at 75 publicly traded dot-coms.

Stock options give the averages a gigantic boost. Total pay packages for a CEO at an online retail company was worth an average $5.7 million in fiscal 1999 vs. $27.1 million for Fortune 100 companies.

Whitman ranked among the lowest-paid executives in 1999 because she did not receive additional stock options, according to the report. She pulled in $292,500 including bonus and salary, eclipsing Amazon chief Jeff Bezos' total pay package of $81,840--which also did not include new options or bonuses.

Peter Neupert, CEO of Drugstore.com, earned $250,000 in salary last year but was granted stock options worth an estimated $34 million. However, the company's share price has plunged to about $5 from a high of $70 last fall. This would make Neupert's 1 million options worthless.

Payday
Some of the top-paid executives at Net companies last year.
Name Company Total 1999 compensation*
Robert Davis Lycos $68,617,721
Timothy Koogle Yahoo $60,483,310
Christos Cotsakos E*Trade $47,607,462
Peter Neupert Drugstore.com $34,343,766
Stephen Case America Online $21,515,175
Mark Breier Beyond.com $8,706,216
Gregory Jones uBid $7,921,146
Jeffrey Bezos Amazon.com $81,840
S. Jerrold Kaplan Egghead.com $100,000
Richard Braddock Priceline.com $300,000
Margaret Whitman eBay $292,500
Charles Conn Ticketmaster Online-CitySearch $235,000
Mark Walsh VerticalNet $300,000
* Includes salary, bonus and estimated value of options received in 1999.
Source: Executive Compensation Advisory Services
Christos Cotsakos, chief executive of online financial services company E*Trade, earned about $523,000 in salary in fiscal 1999--19 percent more than the previous year. Boosted by bonuses and new options, his total compensation reached nearly $48 million, according to ECAS.

Still, E*Trade's shares now hover in the $14 range, near their 52-week low. That means shares that were valued around $40.6 million last year would now be worth far less.

For the moment, compensation packages at Internet companies will likely go unchanged despite the recent stock volatility, experts say. But if stock values continue to drop, Internet companies face an increased risk of losing their top executives and a difficult time of attracting good people.

"People will have a harder time attracting experienced managers from traditional companies and getting them to take the risk involved in an Internet company," said Carl Schmitt, vice president of compensation firm WestWard Pay Strategies.

Net companies will also start to enhance the current pay packages with more stable options such as performance-based bonuses and severance agreements.

"Because of stock market issues and the increasing failure rate of dot-coms, there's certainly pressure on placing guarantees on compensation such as guaranteed bonuses or full-value stock plans," Schmitt said.

Nevertheless, risk-takers have long been attracted to the Internet industry for its fast pace, youthful environment and financial rewards. And compensation consultants say that those factors will continue to drive talent to the industry--though perhaps not as often.

"It's still a great place to be, but it may not be as sexy as it was six months ago," Schmitt said.