E*Trade Financial seems to be stuck in the irrational exuberance of the New Economy, some critics say.
First, the money-losing online brokerage drew criticism for the $88 million in compensation its chief executive received last year. Now the company is being scrutinized for its plethora of chief officers: 12 at last count, including a chief media and content officer and a chief communications and knowledge officer.
The pay issue and explosion of "grandiose" titles should make shareholders pause, said Steve Currall, an associate professor of management at Rice University in Houston.
"Holy smokes, that's what's worth looking under the hood about," Currall said.
E*Trade, which has about 3,500 employees, has a "very flat" management structure, said Connie Dotson, the company's chief communications and knowledge officer. Dotson said the company has four different levels of titles: professionals, business managers, business leaders and officers.
Business leaders include the company's vice presidents and directors of different groups within the company. Dotson did not know how many business leaders E*Trade has.
"We believe it's an absolutely appropriate number of officers," Dotson said. "We believe it's the appropriate amount for the business we're in."
When the company gave chief executive titles to five people last month, it explained the changes in a statement as being part of a reorganization that would help it "enhance the customer experience and accelerate the cross-sell of financial services." Four of the executives were already chief officers and were given new titles, while one person was promoted to an existing chief officer position.
In its proxy statement filed with the Securities and Exchange Commission earlier this week, E*Trade made public what it paid CEO Christos Cotsakos last year. In addition to paying him $4.9 million in salary and bonus, the Menlo Park, Calif., company forgave a $15 million loan, gave him $15 million to cover the taxes on that loan forgiveness, granted him $29 million worth of restricted stock, and paid nearly $10 million into a retirement fund for him.
Cotsakos also realized an $11 million gain by cashing in some 2.6 million stock options. And that doesn't include the 1.3 million options E*Trade granted him last year.
But Cotsakos was not the only E*Trade executive to pull in big bucks last year. Each of the company's top five highest paid executives received compensation totaling more than $1 million last year. Chief Brokerage Officer Jarrett Lilien, for instance, earned $2.2 million in compensation last year, including $1.4 million in salary and bonus, and $742,000 worth of restricted stock.
Meanwhile, E*Trade lost $241.5 million, or 73 cents per share, on $1.3 billion in net revenue last year. E*Trade earned $19.2 million on $1.4 million in net revenue in its previous fiscal year, which ended Sept. 30, 2000. The company last year changed its fiscal year to coincide with the calendar year.
In addition to Cotsakos and Lilien, E*Trade's chief officers include: Mitch Caplan, E*Trade's chief operating officer; Len Purkis, chief financial officer; Betsy Barclay, chief governmental affairs officer; Tom Bevilacqua, chief strategic investment officer; Connie Dotson, chief communications and knowledge officer; and Russ Elmer, chief legal affairs and human resources officer. The company also has Arlen Gelbard as its chief banking officer and president of E*Trade Bank; Pam Kramer as its chief media and content officer; Josh Levine as its chief administrative officer and president of its technology department; and Brigitte VanBaelen as its chief community development officer and corporate secretary.
The proliferation of titles and corporate officers was typical among American corporations until the mid-1980s, when foreign competition forced them to first downsize their staff on the front line, and then their white-collar positions, said Kim Cameron, a professor of business at the University of Michigan. Despite the downsizing in most other industries, such title inflation and top-heavy companies still exist within the financial services industry, he said.
Such corporate organizations were also typical of dot-com companies, Cameron said. Before the market bust, many were growing like gangbusters and wanted to make sure they had their management teams in place to handle their expected growth, he said.
The thinking at these companies is that "the future is unfettered. We can't see any reason why it won't continue to mushroom, so let's continue to pay people a lot," Cameron said. "They haven't experienced tight times. Not capturing that lesson's going to be costly for firms."
But having numerous chief officers could be beneficial for E*Trade and other companies, said Gary Lutin, a corporate governance expert and an investment banker with Lutin & Co. Such titles can help clarify who is in charge of particular departments, something that a "vice president" or "managing director" title doesn't necessarily do, he said.
"It's a common practice. It's done partly for people's egos," Lutin said. But he added, "I find that it's much clearer in terms of descriptive titles. It wouldn't surprise me to see it spreading around."