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High stakes for high-tech CEOs

Fueled by stock options, high-tech CEOs are finding their wallets bulging with compensation. But are they worth it?

They may look different, having traded the traditional CEO's uniform of Brooks Brothers pinstripes for polo shirts and khakis, but make no mistake about it: The fat cats are back.

High-tech chief executives, fueled by hundreds of thousands and sometimes millions of stock options, are finding their wallets bulging like bloated waistlines produced by the three-martini lunches of years past.

See special report:
Fat cats As so many Silicon Valley start-ups mature, their chief executives are finding themselves sitting on a pile of options that are coming to fruition, turning their paper wealth into hard cash. And upon completion of this modern-day alchemy, many executives who have been hoarding their options now are feeling the pressure to cash out, fearing that the market may do the unthinkable and actually decline.

"CEOs in the tech industry are getting more, more, and more because of the bull market," said Carol Bowie, editor of the Executive Compensation Report. "That bull market also makes option grants attractive."

CNET News.com recently commissioned Standard & Poor's Compustat to crunch available data on executive compensation Top 5 CEOs in the industry, selecting up to five of the biggest companies in 13 technology sectors to examine based on fiscal 1997 revenues. Data was compiled from the companies' proxies filed with the Securities and Exchange Commission by June 5.

Of the 59 companies evaluated, the average annual compensation for a chief executive officer was $5 million. Former Intel CEO Andrew Grove topped the list with $52.6 million, while Netscape Communications chief James Barksdale brought home only $1 in salary--earning him the moniker of "St. James" from one compensation expert. (Barksdale still holds a significant stake in Netscape, making him worth tens of millions of dollars on paper.)

Grove, who remains Intel's chairman after giving up the CEO reins earlier this year, received his windfall at a time when the chip giant's fiscal 1997 revenues rose 20.3 percent; its net earnings, excluding extraordinary items, jumped 34.7 percent; and its return on equity was 36 percent. The company's stock, however, grew just 7 percent by the end of the year, far trailing the S&P 500, which rose 31 percent. (Intel is an investor in CNET: The Computer Network.)

America Online CEO Steve Case's compensation ranked him a distant No. 2, collecting $26.9 million last year--roughly half of Grove's take-home pay. AOL saw its fiscal 1997 revenues increase 54 percent while its stock virtually doubled, as the technology-laden Nasdaq rose 20.5 percent during the same time. But the online giant posted a $499 million loss for fiscal 1997, before one-time charges, and its return on equity was a negative 390 percent.

Third on the list was Data General's Ronald Skates, who received $20.6 million in compensation; Advanced Micro Devices' Jerry Sanders, with $18.2 million; Computer Associates' Charles Wang, with $17.6 million; Sun Microsystems' Scott McNealy, with $17.5 million; IBM's Lou Gerstner, with $14.9 million; Iomega's Kim Edwards, with 13.9 million; 3Com's Eric Benhamou, with $12.7 million, and Yahoo's Tim Koogle, with $12.7 million.

Interestingly, Microsoft CEO Bill Gates didn't even make the top ten. But given that he's the world's richest man, with stock holdings exceeding $61 billion, salary isn't exactly a concern.

Seven of the CEOs who brought home the most money benefited from what's known as "long-term compensation"--a sum that includes profits gained from options cashed in--as the main contribution to their pay packages. According to Compustat, long-term compensation accounted for more than 50 percent of their overall pay, not including the value of options granted during the year surveyed.

Although their counterparts in other industries cashed in See special report:
Fat cats options at a similar pace, high-tech CEOs ended up with a significantly larger bounty, Bowie said. The value of cashed-in options averaged $10.4 million for high-tech chief executive officers, compared with $5.2 million for other CEOs based on 1997 data.



Carol Bowie, editor of Executive Compensation Report, on options in a cool market.
 
Critics complain that at least some of this compensation is excessive, and they point to Data General's Skates as an example. Analysts counter that others, such as Barksdale, have been underpaid.

Skates's $20.6 million compensation package got a big boost from a $10 million bonus he received for increasing the company's market capitalization by $1.1 billion in one year, based on a 30-day average share price at the end of fiscal 1997. Since then, however, Data General's share price has retreated from its August 1997 peak of 38 and is trading around the low teens today.

Data General spokesman Dave Roy said the company's board has lowered the maximum that Skates can receive based on market capitalization. Under the new formula, the most Skates can collect is $3.5 million. Roy declined to comment on why the maximum was lowered.

Experts say compensation based solely on a company's stock price should raise red flags. Because a bull market like today's can send many stocks soaring--regardless of the performance of their CEOs--analysts say objective comparisons of a company's stock to an index or to that of its competitors are essential to determine what a chief executive deserves.

Many compensation experts also single out AMD's Sanders as an overpaid CEO. Even though AMD did not award Sanders a pay raise, bonus, or stock last year, he was still ranked the fourth most highly compensated technology CEO after cashing in $15 million in options. Critics argue that AMD's long-running practice of repricing Sanders's options whenever the company's stock price slid helped him pull in a hefty pay package last year, at a time when the company was posting consistent losses.

AMD spokesman Scott Allen said the company has not repriced options for Sanders since the early '90s, adding that he does not know whether any of the options cashed in last year had been repriced.

Topping the list of those considered underpaid is Steve Jobs, who receives no pay for his work as Apple Computer's interim CEO. Jobs did, however, receive the option to buy 30,000 Apple shares at $23 each, well under today's trading price range, according to the company's latest regulatory filings. He also profited handsomely from selling his Next Software to Apple.

And then there is "St. James" Barksdale. Not only did he collect his now-legendary $1 salary last year, but he also returned to the company 300,000 options he was granted in 1997.

That decision was probably more practical than philanthropic, however, as Netscape's sagging stock price had made Barksdale's options essentially worthless. The company began the first layoffs in its history after announcing a loss in January.

Still, other compensation analysts argue that Barksdale's gesture, in which he effectively slashed his own pay, was a powerful one.

"He's divine in the sense of doing something that drastic," said Bud Crystal, editor of the Crystal Report. "Most people wouldn't even think of it."

Go to: Raking it in