Stock Options Becoming Less of a Lure for Executives

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Executives being enticed to Internet companies are no longer as willing to forego cash salary in exchange for stock options as they were a year ago, according to recruiters.

“It was conceivable that a year ago, an executive making $200,000 a year would take a new position for $120,000 with the promise of owning 3 to 5 percent of the company,” said Dan Guerrero, president of eCruiting Inc. in Tarzana. “Now they are more likely to take a $150,000 salary but with a guaranteed $50,000 year-end bonus, plus stock options. They’re not banking on the high IPO evaluations they were a year ago.”

The wild IPO ride may be slowing down and the stock market is making investors jittery, so executives lured to the e-world aren’t taking the plunge unless they have a better salary safety net. In recent months, several IPOs have nose-dived, and stock prices have fluctuated dramatically making stock options a much less attractive deal than they used to be.

Take Pets.com. Even though the San Francisco company launched an extremely expensive ad campaign featuring cute sock puppets and is one of the top sellers of pet products, its stock price is only about two-thirds its initial offering price.

Other Web firms, such as Drkoop.com, a leading health information site, and Value America, a PC retailer, received warnings from auditors that their existence is in doubt. And CDNow, a top online music seller and one of the most popular sites on the Web, has seen its share price plummet on news of a severe cash crunch.

More cash up front

Of course, there are always executives who think they can make a startup into the next Microsoft Corp. or Hewlett-Packard. And they remain more than happy to accept stock options; it’s just that they now want a bigger salary to make the transition from old to new economy.

“Long-term investment stock options are still serving their purpose,” said Ted Jarvis, a senior consultant with Towers Perrin, a management consulting firm. “If these are meant to reward long-term value creation, why should short-term swings (in the market) affect them that much?”

But Jarvis has noticed that already-public companies are changing their executive salary and bonus packages. In addition to stock options, they’re offering more restricted stock packages, which are considered less risky than stock options. In these packages, executives are given a certain amount of stock outright, if they achieve certain goals.

For example, Carly Fiorina, president and CEO of Hewlett-Packard, has a $1 million annual salary plus a $1.25 million bonus. But she also has a restricted stock package worth about $65 million, which she will be free to sell after three years, and options that were valued at more than $25 million when they were granted last fall.

Also, companies are giving special stock grants to longtime executives to keep them from bolting essentially giving shares away for free to people who have been around for a certain length of time.

Payment for services

While stock options have been a tool to reward hard-working executives, they have also been used as a form of payment for business services by companies short on cash but long on potential. They’re still accepted in lieu of cash by many law firms, accounting firms and recruiters, who like stock options for their potential growth.

For example, the L.A. office of DHR International recruited several executives for an up-and-coming West Coast dot-com in 1997. The recruiting firm’s fee was $80,000, but it accepted stock options instead of cash. Two years later, those options are now worth several million dollars.

Would the firm do the same thing today with the gyrating stock market and the uncertain dot-com world? Absolutely, executives say. But they’ll be a tad more wary.

“We’ll definitely have to be doing our homework more than in the past,” said Kevin McKeon, director of recruiting operations at DHR International’s local branch. “It’s a tricky kind of gamble, in most cases. But when they pay off, they really pay off.”

DHR International has equity in nearly 75 companies, McKeon said.

Sometimes service providers will take half their fee in cash, the rest in stock options. Whatever the ratio, the stock option payments can give the recipient a ride to financial nirvana or leave them holding the bag.

“I’m not leery at all to do a stock option deal now,” said Guerrero of eCruiting Inc., which recently received stock options for its work with a new San Fernando Valley telecommunications firm. “I still believe this is a brisk market, and I am not worried about the fluctuations day to day.”

Law firms such as O’Melveny & Myers and Troop, Steuber, Pasich, Reddick & Tobey have accepted stock options in lieu of fees. So have accounting firms such as Arthur Andersen. And even with last week’s wild stock market ride, they’re still ready to hold options instead of cash.

“All this hasn’t change my perspective one iota,” said Michael E. Meyer, a partner at Pillsbury, Madison & Sutro. “The stock market is like the real estate market. We have been very careful, and we’ll be just as careful as before.”

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