High Technology, High Compensation

Those six companies finished 1999 with a combined market value of more than $56 billion, most of that from Wayne's Internet Capital Group Inc., and with losses of more than $270 million.

Since then, the combined value of these former market darlings has plummeted 71 percent.

Leading the way among the technology executives was Mark L. Walsh, chief executive officer of VerticalNet Inc., whose total compensation was $10.5 million, all but $300,000 of it from options profits. Walsh was recruited to VerticalNet in 1997 from America Online Inc.

Big payoffs such as Walsh's are, of course, what lure executives from more mainstream companies to young firms that are more promise than profit. But the roiling stock market has made such overnight fortunes less common, forcing start-ups to offer more cash to lure talent. At the same time, traditional firms have had to offer more stock options and venture-capital opportunities to retain top managers.

"A couple of years ago or a year ago, the differences were more dramatic in that larger, more established companies clearly paid sizable cash salaries because the upside of equity [in an established company] was not what you would see at a start-up," said Stuart Burch, who helped found the Internet practice at Russell Reynolds Associates, an executive-search firm.

The lure of heading the next Microsoft or Yahoo still holds, despite the recent downturn in technology stocks. Executives at traditional firms just aren't heading for the Internet exits as quickly, Burch said.

For many of those who took the risk early, the payoffs have been huge. Walsh, for example, took in about $40 million over the last 12 months as he sold about 455,000 shares of his Horsham company's stock, according to Thomson Financial Co.

Don't read too much into that, though.

Walsh notes that the shares he sold represent only about 10 percent of the options he has been granted since joining the company as chief executive shortly before its February 1998 initial public offering. He said he sold shares simply to diversify his holdings, as his wife and his financial planner had asked him to do.

"I have sold every middle month of every quarter since we went public, and sold the exact same amount in both quarters of this year," Walsh said. "I plan to do that every quarter for diversification purposes."

Walsh also noted that he has bought some VerticalNet shares.

Many tech executives say they feel pressure to take at least some of their winnings off the table to lock in their families' futures.

Kevin Kilroy, chief executive officer of Bluestone Software Inc. in Mount Laurel, sold 205,000 shares in his company for $18 million in February.

"In the overall great scheme of things, it isn't that much," said Kilroy, who had 286,857 exercisable options as of March 8 and 649,444 unexercisable options as of Dec. 31. "I'm still heavily invested, but I, too, have very important shareholders - my wife and my daughter."

Unlike Walsh with VerticalNet, Kilroy does not own any Bluestone stock outright. He just has the right to exercise options in the future.

Many tech executives sell stock in their companies to diversify their holdings, executives at recruiting firms said. Compared with their peers at traditional firms, executives at young technology companies typically have a much higher percentage of their net worth tied up in their employers' stock.

"There's nothing cynical or evil," said Kevin Murphy, finance professor at the University of Southern California. "It doesn't mean they know anything about the stock that other people don't know. It just means they want to diversify."

Culture also plays a role, said Russell Miller, a partner in the New York office of SCA Consulting L.L.C., a compensation consultant.

"You do see the options exercised and sold more regularly [at technology companies] because it's a key component to their overall compensation," he said, "whereas, in traditional businesses, there's a cultural bias that says you don't exercise and sell your options until you have to."

To reinforce the idea that managers should be owners and to help avoid heavy sales by insiders at the same time, some technology companies have implemented rules that dictate how much executives can sell and when.

VerticalNet lets executives sell only in the middle of every quarter. The policy limits the number of shares that can hit the market at once and, company executives said, helps ensure that insiders do not trade on advance information about quarterly earnings.

Krista Hayes, a principal in the Los Angeles office of Frederick W. Cook & Co., which consults with technology companies, said: "If all the executives sell at the same time, it could send the stock price into a tailspin."

She estimated that senior executives at a young technology company own as much as 25 percent of their firm's outstanding stock, compared with 15 percent at a more traditional firm.

That can mean dramatically changing fortunes for executives lucky or smart enough to pick the right company.

At the end of 1997, David Gathman was chief financial officer at Wayne's Integrated Systems Consulting Group, which was acquired by First Consulting Group Inc. in December 1998. In that job, he was looking at a potential gain of $568,718 on Integrated Systems options.

In March 1999, Gathman left to join Internet Capital Group. At the end of the year, he was sitting on $33.3 million in potential profits from ICG options. Since then, the stock price has fallen 66 percent, decreasing those potential profits.

Slowly, pay practices are changing. The promise of stock alone won't lure managers to start-ups anymore, several consultants said.

The average salary at a young technology company has risen 10 percent this year as the potential for stock market riches has waned, Miller of SCA Consulting said. Of the 100 top-performing initial public offerings of 1999, about half are now selling for less than their offering prices, leaving many employees with worthless options, he added. Cash helps get and keep employees in those situations, he said.

At the same time, larger companies are creating new incentives based on the stock market to keep employees. Lucent Technologies Inc., for example, has a venture-capital arm that allows employees to profit from successful investments. Some companies offer a stick with their carrots. International Business Machines Corp. has sometimes forced executives who have joined competitors to repay the value of exercised IBM stock options, said Burch of Russell Reynolds.

Progress Financial Corp. of Blue Bell has helped turn a mainstream bank into a high-tech lender by giving management incentives to make loans to young companies. The banking company gets warrants to buy stock in some of the companies to which it lends. Senior Progress executives can obtain up to 25 percent of those warrants.

For Progress' chief executive officer, Kirk Wycoff, that has meant profits of $690,000, assuming he still holds the warrants, in such companies as VerticalNet, Ravisent Technologies Inc., and U.S. Interactive Inc.

Michael High, Progress' chief financial officer, said top bankers who bring new business to the bank should be able to profit from that effort. "It's almost like a bonus program, if you will," he said.

High said the company addressed concerns about conflicts of interest by insisting that executives who own warrants in Progress' borrowers do not make lending decisions about those companies. Members of the loan committees are made aware of the warrants held by each executive.

Since mid-1999, Progress has earned about $6 million in pretax profits from its warrants.

"The warrants have contributed fairly significantly to the profits of the company," he said.

Miriam Hill's e-mail address is hillmb@phillynews.com

* Inquirer staff writer Harold Brubaker contributed to this article.