Option Play For Executive Pay

At the time, it was considered the most unceremonious of dumpings for the senior vice president and career IBMer.

Now, she can look back and see 48 million reasons to be happy about it. Hancock, now chief executive of Exodus Communications Inc., reaped stock options worth more than $48 million last year in her role running the ASP.

Gerstner, while receiving $9.2-million in salary and bonus last year (tops on the Salary Survey list), got no such options from IBM, which had a record year in sales.

Many compensation experts from around the industry took a football-like strategy in setting executive pay last year,it was somewhat of an "option play."

Even in a year in which Y2K concerns slowed some parts of the industry to a crawl, more executives were paid higher figures in salary and stock options than ever before.

According to a CRN review of nearly 130 industry companies, 33 executives were awarded at least $20 million worth of new stock options in 1999.

That is separate and apart from the ever-growing billionaire's club, which now boasts 24 members led by Microsoft Corp.'s Bill Gates and rounded out by Jonathan Nelson, chairman and chief executive of Organic Inc., the e-business and logistics integrator.

Leading the bunch in stock options last year was Cisco Systems Inc. Chief Executive John Chambers, who also squeaked onto the billionaire's list with a net worth of $1.006 billion.

Chambers gained options last year that could be worth $126-million if Cisco shares gain between 5 percent and 10 percent in value in the coming years, a conservative estimate given Cisco's track record.

Chambers is Exhibit A for those observers who have been making a case that executive compensation should be tied to a company's performance. "In 1999, you'd be hard-pressed to find somebody who did a better job than John Chambers," said Paul Sagawa, an analyst at Sanford C. Bernstein Inc., New York, who covers San Jose, Calif.-based Cisco. "If anybody's worth it, it's probably Chambers," he said.

Chambers has been rewarded during a time when Cisco has given Wall Street what investors look for: top-line growth, Sagawa said.

In addition, Cisco's climb made it one of the highest-valued companies in history with a market capitalization of almost $500 billion.

"Cisco's market capitalization would be cut by more than [$126-million] if Chambers weren't chief executive," Sagawa said.

Getting A Run For His Money?
		The battle for the title of the world's richest man is on: Microsoft Chairman Bill Gates (L.) is looking over his shoulder at Oracle Chairman and CEO Larry Ellison. Gates, whose net worth was pegged at $81B last year, has been hit hard by the government's ongoing antitrust case.

"We get worried that people are going to start choking on options," said Steve Hall, an executive compensation expert at Pearl Meyer & Partners Inc., a consultant firm in New York. "Everything is spectacular when the market is going up. . . . We've seen a pretty choppy opening to 2000," he said.

In 1999, some segments of the market only saw an upside to sales and their stock,including the market for ASPs.

Hancock, the former IBM and Apple Computer Inc. executive, now runs Exodus, a high-growth ASP in Santa Clara, Calif.

Hancock's 1999 base pay was $250,192, but she was granted stock options that could be worth $48-million if Exodus' stock grows between 5 percent and 10 percent in the coming years.

It is impossible to say exactly how much the options are worth to the penny, given that it depends on the price of the shares at the time they vest. Instead, companies assume 5 percent and 10 percent growth rates when reporting how much their top executives' stock options would be worth.

Hall cautions against reading too far into those numbers, which are estimates provided to shareholders based on guidelines from the U.S. Securities and Exchange Commission. The estimates project into the future and only reach the full value when the options become vested and are sold.

While Exodus shares took a beating earlier this year when the Nasdaq lost 30 percent of its value, the stock still grew by 400 percent over a two-year period.

Hancock's options vest over 50 months, according to Exodus' proxy statement to shareholders.

"Ms. Hancock received these options in recognition of her performance over the year, to [offer an incentive for] future performance and as a tool for retention," wrote the compensation committee of Exodus' board in the company's proxy.

Exodus' sales grew by almost 500 percent in 1999 to $242 million, even though its balance sheet showed $130 million in red ink.

Hancock's net worth, which is made up of the shares of Exodus she controls, reached $320.4 million in just more than two years at the company. Her former boss, Gerstner, owns IBM shares worth $532.2 million.

The growth of compensation paid out in options is unlikely to abate soon, "as long as revenue,not even profits, but revenue,continues at the rate it is going," said Sam Albert, a Scarsdale, N.Y.-based consultant and board member for several companies, including Nestor Inc., Providence, R.I., a maker of data-mining software.

Who's In The Catbord Seat Now?
	Five years after IBM Chairman & CEO Louis Gerstner (top) showed her the door, Ellen Hancock smiles alot. The Exodus CEO reaped stock options worth more than $48M last year, while Gerstner received $9.2M in salary & bonus, no options.

Modern industry can be split into three basic groups: older, "smokestack" companies staying in traditional business; smokestack companies doing some Internet business; and dot-com pure-play companies, Pearl Meyer's Hall said.

"Every one of them is facing untold grief right now" in trying to structure compensation packages, Hall said. In some cases, older companies injecting e-business into their operations must factor in new economy pay scales for newer executives, fighting established culture. Many new Internet companies "have lost the sense of reality that many people used to have" that markets can only go so high, said Hall.

Notwithstanding the Steve Jobs of the world, who accepted $1 in salary last year as chief executive of Apple, Cupertino, Calif., executive base pay raises also were common last year.

Of the top 500 highest-paid executives for 1999, 306 saw increases in their base compensation (salary plus bonus), while 109,including IBM's Gerstner,saw their base pay cut over 1998.

Some noteworthy executives who were in the news in 1999, and observations:

• Michael Capellas, who replaced Eckhard Pfeiffer last year as Compaq Computer Corp.'s chief executive, gained stock options worth $49 million in taking over the once-troubled computer maker.

• Oracle Corp. President Ray Lane, who is rumored to be in the running for top spots at both Compaq and Hewlett-Packard Co. last year, saw his salary jump 175 percent to $3.25 million. He also received options worth $20.8 million.

• Microsoft Chairman and Chief Software Architect Bill Gates is getting a run for his money as the world's richest man by nemesis Larry Ellison, chairman and chief executive of Oracle Corp. Gates' net worth has been hit,and hit hard,over the past year by the ongoing U.S. Justice Department antitrust case against Microsoft, as well as the proposal to split the company in two. Last year, his net worth was tabbed at $81 billion and even jumped above $100 billion for a time over the past year.

• Last year's top executive on the salary list, Lucent Technologies Chief Executive Richard McGinn, took a 51 percent pay cut in 1999 and dropped to third on this year's list with cash compensation of $6.2 million.

• Motorola Inc., Yahoo Inc. and Oracle each placed four executives in the $20 million options club. Cisco and CDW Computer Systems each placed three of its executives there.

• There are 24 billionaires on the Top 200 Stockholdings list this year, compared with 12 in last year's Salary Survey.

• Ninety-four executives in the top 500 gained $1-million or more in salaries and bonuses in 1999, compared with 80 executives a year earlier.

Not all executive pay comes in the form of dead presidents, either.

Take, for example, the case of John Conley, executive vice president at Iomega Corp., Boise, Idaho.

During the year, Iomega paid out more than $23,000 for Conley to take a "cruise vacation paid under the company's 100 percent club for his role in supporting the sales and marketing department during fiscal year 1999," Iomega said in a statement to shareholders.

IBM's Gerstner has a clause written into his compensation that, even after he retires after age 60, he will still have access to the company jet in a role as a consultant.

Advanced Micro Devices Inc. has spent about $250,000 over the past three years on personal security for its chairman, Jerry Sanders. Other executives have seen their companies pay tens of thousands of dollars for personal cars, private jet use and spouses to accompany them on business trips.

Other executives have so much money, their companies have gotten them help handling all of it.

Michael Dell, whose net worth topped $18 billion and who is now one of the world's richest men, got some assistance taking care of his personal financial holdings. His company said it shelled out $11,615 for Dell to "receive personal financial counseling and tax planning services" last year.

Perhaps a good gauge of sentiment over executive compensation is the political arena, Hall said. In 1992, when Bill Clinton was running for president, executive pay was a hot issue.

"A lot of this hubbub over executive compensation doesn't get heard of this year," Hall said.CRN