by Leslie Tebbe
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What would you do if only a third of your salary was guaranteed, and the rest depended on how well you did? Would your answer change if your base pay was more than $200,000 and you stood to make half a million more in annual total compensation, with a 6 percent stake in the company? That's the going rate for an Internet executive, according to PricewaterhouseCoopers.
We expect executives to make far more than the average employee, but the startup economy has expanded the traditional pay grid for top management. The new compensation philosophy is predicated on "pay for performance," the idea that executives should be paid not just for showing up, but for contributing directly to their company’s success.
The executive recruitment cycle looks like this. Young, fast-growth companies in fast-growth industries, short on cash but long on vision, start to offer performance-based noncash incentives to compensate for their higher risk and sometimes lower base pay. Entrepreneurial executive talent takes the bait. More mature companies respond by offering comparable perks to lure and retain the best executives the decade has to offer. In the final stages before an initial public offering, many companies splurge on hiring heavy hitters, some of them household names, to make the company more attractive to investors. In the meantime, traditional corporations slow to adapt to the new compensation model begin to lose their top talent.
The best prefer to be paid for the value they add. In high-tech especially, executives can practically name their price.
The going rate for executives at Internet startups is $207,456 in base pay, $671,220 in total annual compensation, and a 6 percent stake in the company, according to PricewaterhouseCoopers. Salary.com’s numbers show that the average chief executive officer in the United States makes more in base pay – $359,941 – but less in total compensation – $483,668. The highest percent of Internet chief executives earn more than the top 10 percent of chief executives at Forbes 800 companies when stock options are included in earning totals, according to a study from headhunting firm Spencer Stuart. So it’s the long-term incentives that both attract executives and make them worth more.
The American Compensation Association reports that there has been a 50 percent increase in pay for competency over the past decade.
Executive compensation is a challenge to estimate, especially in Internet companies, because of the uncertainty in calculating the value of stock options in pre-IPO companies. Analysts must determine a price per share based on information that is difficult to obtain or estimate, such as the number of shares outstanding and the price per share.
According to the Vault, this year executives will get the largest pay increases ever, mostly due to the performance of the stock market. As the Internet economy continues to expand, more corporations are expected to adapt compensation philosophies based on pay-for-performance. If so, the disparity in compensation between executives at Internet companies and at traditional companies will narrow.
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