Tech CEOs add hefty salaries to options packages

By Sam Ames, Staff Writer
CNET

March 24, 2000

The days of relatively low pay and massive stock options may be over, as high-tech start-up executives now want big options packages along with fat salaries.

Lucrative options packages have long been used to lure top executives as a way to compensate for the increased risk of joining a young company at a relatively modest salary.

But as demand for top talent grows, tech executives are increasingly demanding, and getting, fat salaries as well.

"The typical story used to be a guy has started a business in his garage, and he can't pay his bills because the evil (venture capital) company isn't giving him enough," said Steve Hall, a managing director at Pearl Meyer & Partners, a firm that researches and designs executive compensation packages.

"Now there's so much VC money floating around out there that VC companies are willing to be quite generous in their compensation," he said.

George Shaheen, for example, abruptly left his top job at Andersen Consulting last September to join online grocer Webvan, which had not yet gone public. Not only did Shaheen receive a 5 percent stake in a company that currently has a market value of about $2.9 billion, but he also received an annual salary of $500,000.

"There are a lot of VC companies, a high employment rate, and a lot of competition for executive talent," said Jean Yaremchuk, chief operating officer of VentureOne, which this week released a survey that offers a glimpse into the hiring trends at nascent tech firms.

According to VentureOne's poll of 800 private companies that received venture funding, the average CEO in the information technology industry earns $200,000 in total compensation. The survey did not include the value of stock options.

While many of the results in the survey were expected, some surprises were found:

• CEOs at start-ups in the health care industry receive a median annual compensation of $220,000, about 10 percent more than CEOs in the technology industry.

• The higher pay is apparently a result of the high employee churn rate. The turnover rate in the health care services and consumer products industries is about 16 percent, compared with less than 6 percent in information services and about 10 percent in the software and semiconductor sectors.

• Silicon Valley, despite the high-cost housing and density of tech companies, did not offer the best pay for CEOs. The Potomac region on the East Coast topped the list at $225,000, followed by the Northwest ($203,000), Southern California ($200,000) and Northern California ($200,000).

VentureOne's report did not compare the results with previous years, but compensation experts noted that pay levels for CEOs are rising as tech start-ups proliferate.

"The general model used to be low pay with high equity," said Doug Friske, a principal at Towers Perrin who focuses on executive compensation. "You can't get away with that now."

"Either you belly up to the bar and pay the market rate, or you don't," he added.

The VentureOne survey also indicated little pay difference between venture-funded Internet companies and non-Internet companies. In fact, offline companies tend to pay more. The median compensation of a chairman and CEO of an online company is only $194,000, compared with the $233,000 paid to an "old economy" counterpart.

The real payoff for joining a dot-com company seems to be at the sub-CEO level. The survey found that vice presidents in Internet companies receive a higher premium for their services than their counterparts in non-Internet companies.

A vice president of product marketing in a VC-backed Web company gets 18 percent more salary than the median, and a vice president of clinical trials gets 40 percent more.

"VPs have a greater level of responsibility in technology companies," VentureOne's Yaremchuk said.

To explain the higher salaries of executives in the Potomac area, Yaremchuk said they "are not younger executives on their first start-up. They are typically older executives from government or defense positions with extensive technology backgrounds and a history of higher salaries."

Early investors are willing to pour money into start-ups and to pay high salaries because of the potential payoff when the company goes public.

"Right now there's a total embracing of VC-backed companies by investors," said Yaremchuk.

But that could change if companies continue to lose money.

"A lot of the run-up in pay is the result of market performance and not company performance," said Patrick McGurn, a director of corporate programs at Institutional Shareholder Service, which advises institutional investors on pay issues.

"No one is going to quibble over what General Electric pays (CEO) Jack Welch," he said. "The problem is the companies who reward their executives for a middling performance.

"My (institutional investor) clients are starting to look for executive compensation that's tied to company performance and not stock performance."

Copyright 2000 CNET Networks, Inc.