On Escrow Death Row

By Marc Phillips, APT Strategies

Stock options have not always been a traditional part of remuneration for Asia-Pacific executives. However, when the commercial Internet wave washed through the region in the late 1990s, it brought in its wake much of the business culture associated with California-style techno-capitalism. In came casual work clothes, all-night work sessions, pets in the office, executives barely out of high school and the opportunity to acquire discounted equity through option schemes. 

Sally Mills of Sydney-based Internet recruitment specialist Mills and Harding has been active in recruiting executives for the past four years. She says that equity has always been genetically coded into Internet culture. ``When the first local dotcoms were formed, they were made up of groups of specialists who came together by word of mouth. It was only natural that equity was involved as these partnerships developed into companies.'' 

She says that equity was, and still is, a drawcard for many senior executives and their key employees, but that in late 1999 the whole scene `went crazy'. Pressure had been building for some time as a number of senior staff from old economy companies jumped ship to dotcom start-ups, lured as much by the opportunity to do something exciting and entrepreneurial as by the financial rewards. Indeed, she says that four years ago many old economy executives were taking substantial pay cuts in order to jump on board the new economy.

However, by 1999, with dotcom share prices soaring and the new economy operating in top gear, many start-ups found they had to give away more and more equity simply to attract and retain staff with the right skills and experience. ``In many ways, options were used as golden handcuffs, tying senior executives to their desks.''

American companies, particularly those in technology fields, have used stock options as a way of linking senior executive performance and pay for more than a generation. From modest beginnings the practice snowballed to the point where the options are now often worth considerably more than the base salary. For example, by the end of 1999, the CEOs of Sun Microsystems and Hewlett-Packard received fresh options than comprised some 71% of their total packages.

Indeed, the practice is responsible for the largest and most widespread bout of wealth creation in history.  Many American CEOs and other senior executives are now worth many tens of millions of dollars thanks to option schemes. And it isn’t just the bosses – at one point almost 1000 Microsoft employees had a personal wealth that was, on paper at least, worth more than US$10 million.

Mills says that during the boom years it was more common for an Internet CEO in the Asia-Pacific region to receive around 50% of their total remuneration in options - for people working at lower levels, the percentage would be lower. ``Stock options in one form or another have always been an important component of CEO compensation in Australia, but things really took off here in the late 1990s.''

Interesting, this move towards paying senior staff in equity isn't just restricted to the new economy. Surveys of senior executive remuneration patterns around the region show a marked shift towards performance-linked pay during the past decade with a clear emphasis on stock options. For example, in its 1999 survey of New Zealand CEO remuneration, PriceWaterhouseCoopers found: ``Bonus components typically equated to 15%-35% of base salary for CEOs of large, single New Zealand companies, and 25% - 30% of base salary for CEOs of international companies. The overall average for CEOs equated to 24% of base salary.''

Things are not remarkable different anywhere in the region.

The problem with this move toward equity pay became clear following the March 2000 tech wreck when the market value of most dotcoms and many other technology-based companies plummeted overnight. In almost every case the executive options packages became either worthless or almost worthless.

Some large, more established technology companies, most notably Microsoft issued fresh options with a lower strike price. However, this didn't help much -- technology share prices continued to fall during 2000 and Microsoft's second bite at the equity cherry still left executives under water. That company has suffered a significant loss of key staff as falling share prices unlocked the golden handcuffs.

Melbourne-based Jo-anne Fisher of Russell Reynolds, one pf the top three global management search organisations, says that since early 2000 there's been a lot of movement in executive remuneration practices but that she isn’t observing a pattern of CEOs walking away from companies because of the fall in options.

She says that senior managers are more concerned about company stability and the future prospects. “Options are perceived as being nice to have, but they aren’t everything. Other more fundamental things are more important.”

This is particularly true when companies try to recruit senior managers in the post March 2000 world. She says, "These days the draw cards are much more about the likely future success of a company and its opportunities."

Mills confirms this return to fundamentals saying that options are still there – but there’s now recognition of the increased risk factor associated with this form of remuneration. She says that potential CEO recruits are more likely to quiz companies about the quality of their management team and their track record in earlier projects than discuss the minutiae of options. 

Fisher says that Internet start-ups and other tech companies are now taking a much more realistic approach to remuneration packages. "There was a time when they would offer less cash and more options. That's changed. Today the best candidates are getting offered packages that are mainly cashed based."

"The trend now is towards incoming CEOs regarding options as being something that is nice to have -- rather than the lynchpin of their salary. So it's a case of back to market rates for CEOs and that means a much higher base salary."

She says its important to realise that CEO packages are not just made up of cash and options, there is generally also a more conventional performance related pay element which is based on key performance indicators rather than a simple rise in the company share price.

If there’s a whiff of 1980s-style ‘greed is good’ hanging over the entire dotcom industry and its management recruitment policies, this is probably a misreading of reality. Both Mills and Fisher agree that, while external media might focus on wealth creation through options, this isn’t the main game plan or even the main motivator for most senior managers.

Shane Murray, founder along with Anthony Bertini of the BMC Media group echoes these comments. He says that Internet CEOs do not necessarily conform to the body piercing ride-a-razor-scooter-to-the-office-that-looks-like-a-nightclub stereotypes depicted in the media. He says, “The clichéd dotcom CEO image simply isn’t true. You’ll find most are over 35 and pay themselves modest wages because they are in business for the long haul.”

Murray says, “It’s the company that I started with my colleague. We’re more focused on expansion into Asia, recruiting top quality staff and training them for the future than on pulling a quick buck out of the market. I plan to be in this business for the long term.”