E-PAY
Executive compensation in internet companies
UK internet companies are developing a similar approach to executive compensation as US e-commerce businesses. For many companies on both sides of the Atlantic generous equity grants are used to supplement low cash compensation. This is the main conclusion of a study undertaken by SCA Consulting and executive search firm Futurestep.
With Europe’ s internet talent in seriously short supply, it seems that more and more web companies are using incentive compensation as a strategic tool to give them the edge in the battle to attract and retain high-flyers.
Says the SCA study: With less loyalty to one company, demand for talent out-stripping supply, constraints on cash and volatile equity valuation, a distinct model of compensation for internet companies has rapidly evolved.
Internet-style rewards
So, what does this new-economy compensation model look like? What emerges clearly from the SCA study is that there are no fewer than three essential ingredients to internet-style rewards in web businesses.
We find UK-based e-businesses follow the same general pattern as in the US — a higher reliance on equity participation at all levels throughout the organisation, less cash compensation and fewer bonuses. Across the board, the levels of compensation are less in the UK than they are in the US. — SCA Consulting and Futurestep.
1. Internet companies offer less cash compensation
Short-term cash — salary plus annual bonus — is as much as 37% lower for executives in stand-alone internet companies that are privately owned, compared with their counterparts in traditional businesses.
2. Internet companies offer fewer bonuses
Seven in ten traditional companies pay an annual bonus. In pre-IPO internet e-businesses the figure is just 42%, with post-IPO in their wake at just 37%.
Bonuses in internet companies are invariably tied to specific performance measures — most commonly achievement against strategic milestones, share price performance and number of web-site users.
3. Internet employees typically have a substantially higher equity holding
Received wisdom argues that if any form of incentive package underlies the reward strategy in new economy businesses it is, of course, the equity incentive.
As the SCA Consulting study puts it: Equity is the critical component of internet pay, encouraging long-term performance and retention while minimising cash expense.
According to the data gathered by the researchers, while participation in long-term incentive schemes at traditional businesses is usually restricted to senior staff, share options at internet companies have permeated much further down the hierarchy.
As many as 71% of internet companies make options available to the entire workforce, while 21% offer them to at least three-quarters of their employees. Just 7% confine them to less than three-quarters of staff.
Want to know more?
Title: SCA Consulting and Futurestep e-pay UK study.
Methodology: on-line questionnaire covering compensation levels and incentive design for executives in the internet sector. Areas covered by the study include total compensation levels, percentage of equity granted to employees, allocation of equity between employees, option vesting schedules and performance measures.
Sample size: information for the report was provided by 70 organisations.
Business sectors: Firms participating in the survey are split equally across pre- and post-IPO internet companies and the internet divisions of large organisations. They are engaged in a variety of internet businesses, including services, retail, search engines, media and ISPs.
Availability: Take a look at some of the key findings of the survey . . . http://www.scaconsulting.com/epay/uk_highlights.html
To receive a free copy of the executive summary jump to . . . www.scaconsulting.com/epay/uk_request.html
Do you wish to participate in the next study? If so, please email jtaylor@lon.scaconsulting.com. All participants receive a complimentary copy of the executive summary and participants report, together with an invite to a special e-pay event.