Internet CEOs Getting Modest Compensation

The average total direct compensation for a chief executive officer at a publicly traded Internet company is a relatively modest $1.74 million, according to a compensation survey conducted by PricewaterhouseCoopers. But CEOs on average have a 12.1 percent equity stake in their company, or a value of $468.5 million. The survey also documents the wide use of stock options to compensate directors and employees of Internet companies. Total direct compensation is defined in the survey as annualized base salary, plus cash bonus, and long-term incentives including stock options restricted stock and long-term cash payments.

“Using stocks to attract, retain, and generously compensate many senior level managers, as well as employees and directors, is not atypical for start-up companies,” said Edward Speidel, a director in PricewaterhouseCoopers’ Global HR Solutions. “But Internet companies are using this tactic more aggressively than most.”

The survey focused on the top 15 executive positions at 112 public Internet companies, including software, services, content, and infrastructure. It was based on data from annual shareholder proxy statements and yearly reports released in 1999. Of the 112 companies, 71 percent had an IPO in the last three years.

The top technology officer at companies with market capitalizations of more than $2 billion has total direct compensation of $5 million, on average. The compensation for top technology officers at companies with market capitalizations of between $500 million and $2 billion is only $649,601, on average. The sharp drop off underscores the value that larger Internet companies put on technology mavens.

The total cash compensation for CEOs was $312,899, on average. This was less than the average cash compensation of $478,980 for a company’s top division executive at larger market capitalization companies. The cash compensation for chairmen was $318,502, on average, and the total direct compensation was $1.03 million, on average. (Total direct compensation is both cash and the projected wealth opportunity created by a grant of options or restricted stock.) Chairmen had on average a 21.9 percent equity stake in the company, or a value of $3.28 billion.

Chairmen and CEOs who were not the founders of their companies were paid more than their counterparts who did. Nonfounding CEOs were paid $2.16 million on average, and nonfounding chairmen were paid $1.31 million on average, compared to an average of $978,468 for founding CEOs and an average of $784,086 for founding chairmen. But, as expected, the founding CEOs and chairman also had substantially higher equity stakes in these companies than nonfounders.

“Many Internet companies were started by visionaries who had to use high compensation packages to bring in new top management,” Speidel said. “But the visionaries who have retained their management positions have also held on to a large ownership in the company and are currently amassing considerable value on paper.”

According to Speidel, the compensation philosophy used by Internet companies will have repercussions in other industries.

“ companies are creating e-commerce subsidiaries, but they will have a difficult time attracting top talent unless these traditional companies have an exit strategy – such as an initial public offering – that can potentially enrich the break-away company’s senior management,” he said.

Most Internet boards of directors have a high stake in seeing their companies’ share price appreciate. According to the survey, 72 percent of the companies use some form of equity to compensate their directors, whereas 31 percent compensate them through cash. Stock is also used liberally to compensate employees. The survey measured the potential dilution attributable to employee equity programs, known as “overhang.” It found the median overhang was 23 percent of shares outstanding.

“Anything over 20 percent in the technology industry is considered high,” Speidel said.

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