Overpaid at the Top

FRAMINGHAM (04/18/2000) - Several years after the Web first captured the imagination of the business press, big-time executives are now rushing headlong into cyberspace.

Late in 1999, George Shaheen left his perch as CEO of Andersen Consulting Inc. for startup Webvan Group, based in Foster City, California. Soon after, Richard Nanula, the former president and COO at Starwood Hotels and Resorts Worldwide, signed on with BroadBand Sports, a Los Angeles-based company that runs websites like Athlete Direct. And Kirkland, Washington-based HomeGrocer.com hired Mary Alice Taylor, a former executive at Citicorp and Federal Express, as its chairman and CEO.

Internet companies, lacking profits, impressive revenues and anything resembling a long-term, steadfast business plan, need seasoned executives to reassure Wall Street analysts and institutional shareholders that their enterprises are viable.

And why are accomplished managers exchanging cushy corporate suites for Spartan startup digs? The answer is simple: money. Joining internet companies offers these mere millionaires the ability to become multimillionaires in a matter of months if the initial public offerings take off.

But I believe the sudden awakening of middle-age executives to the glories of URLs and cookies may be a sign of something other than the medium's maturation.

Over the years, CEOs at big companies have figured out myriad ways of wringing compensation from their companies: cars, interest-free loans, lucrative pensions and golden parachutes. Now they're bringing that ethic to bare-bones startups.

In October 1998, when TheStreet.com -- then still privately held -- hired Kevin English from Lexis-Nexis as its CEO, he commanded a hefty premium to the wages earned by the online magazine's editors: a $350,000 base salary, a bonus of up to $100,000, the use of a one-bedroom corporate apartment and a parking space.

In all, English would cost TheStreet.com nearly $500,000 per year, a sum equal to one-eighth of the company's 1999 third-quarter revenues.

The investment proved a poor one. English shepherded the company public in May 1999. But the stock soon slumped below the IPO price. And last November, having lost the confidence of TheStreet.com's board, English was out on the street.

At 55, George Shaheen likewise has higher maintenance costs than his twentysomething counterparts. His base salary at Webvan is $500,000, with a target bonus of $250,000. Just for signing, Shaheen was given 1.25 million shares of stock and options to buy 15 million over the next four years at $8 per share. (Webvan went public at $15.) Webvan also loaned Shaheen $6.7 million at the bargain-basement rate of 6.2 percent. This from a company whose virtual registers racked up sales of only $395,000 in the first half of 1999!

Let's compare these goody-bags with the salaries taken home by two web pioneers who run companies with comparatively long operating histories and significant revenues. In 1998, Jeff Bezos of Amazon.com received a salary of $81,840. No bonus. Yahoo Chairman and CEO Tim Koogle got a raise in 1999, to $290,000 from $195,000 in 1998.

It should come as no surprise that veteran offline executives parachuting into online posts demand pay that is off the established charts. But the trend toward hefty guaranteed salaries may have a significant fallout. Internet companies are already saddled with the twin burdens of low margins and exploding marketing costs. Now they're taking on the recurring expense of high-priced managerial talent. After investing large fixed sums into human resources that are unproved in this new medium, internet companies may find the goal of profits to be ever more elusive.

Daniel Gross is a freelance writer based in New York City.

CIOS NEED TO understand how much they are under the gun. Most CIOs recognize that the implications of ongoing technological developments are huge, yet at the same time they know assessing such developments is difficult. Developments are fast occurring in two areas: technological, such as client/server, object orientation and the internet; and business, such as supply chain management, customer relationship management and flow manufacturing. The changes in these areas interact to stimulate further change. Not surprising, the task of successfully integrating these changes and technologies is not appreciated by others within the company as much as it should be.

On top of all this, the external environment of the enterprise is becoming much more dynamic. The increased pace of change in the business world is creating a feedback mechanism to the CIO. The very actions that a CIO and an enterprise take to enhance supply chain operations, customer relationship management or e-commerce efforts create market pressures on competitors that in turn respond.

These responses feed back to the CIO, creating need for additional changes.

Unfortunately, the traditional methods IT uses to change the supporting information infrastructure are just too cumbersome. IT designs and manages systems under the assumption that they are to be permanent. Hence systems are not designed with ease of change in mind.

When an IT department has a backlog of change requests measured in years, it's a foregone conclusion that the IT function isn't keeping pace with the rate of change in the business environment. When this is the case, the IT department is a drag on corporate strategy.

Therein lies the danger. Gone are the days when enterprises in an industry could feel safe knowing that whatever constraints they have, their competitors also have.

The enterprise that builds a flexible information infrastructure -- one that is designed and managed to enhance maintainability with a knowledge of how IT systems interact with and affect business processes and goals -- has the means to develop a significant competitive advantage.

History is filled with the corpses of once mighty companies that just could not keep up with change: U.S. Steel, Packard Bell and RCA are emblematic of companies that once dominated their industries yet ultimately failed to compete effectively. They had size and money but not flexibility.

Thus, the CIO has a choice. The CIO can wait until called on by the board to report why a corporate strategy has to wait on IT, while a competitor reaps the profits. Or the CIO can go on the offensive.

A CIO who opts to be aggressive should direct the building of a flexible information infrastructure that has the ability to change faster than the company or its environment.

By enabling enterprise flexibility, the CIO will ensure that the corporation thrives in the new millennium. Thus, IT becomes a key element of achieving corporate strategy.

Craig K. Dillon is vice president of flexible enterprise solutions at S3 Consulting, a Naperville, Illinois-based consultancy.

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