Sky-High Prices for Web Stocks
Spark Debate on Option Values


Experts are having fits trying to keep up with the dizzying run-up of Internet stock options.

Take the case of Margaret Whitman, the eBay Inc. president. Did her slew of 1998 stock options transform her into an Internet billionaire or not? One executive-search firm values her package at nearly $1.2 billion on paper. But the Web auctioneer itself reported that exercising the options produced a more modest gain: $42.7 million.

Who's right all depends on how you count options -- and when. A debate is raging over how to assess the cornucopia of options commonly doled out by Internet companies. In this young, highly volatile industry, traditional valuation models seem pointless.

Now, even the U.S. Securities and Exchange Commission is giving the matter another look. Noting that the agency is reviewing its proxy-disclosure rules for executive pay, last revised in 1992, an SEC spokesman says, "Valuation of options is certainly something we're looking at."

The options debate is also changing the cat-and-mouse game of recruiting employees, especially in the Web world. The stratospheric values being bandied about are spurring job-hoppers everywhere to expect -- and demand -- eye-popping packages of their own.

At the heart of the debate is the hottest engine of the boom in bull-market wealth.

For years, companies have valued stock options one of two ways, as required by the SEC. The first involves projecting the options' value at their expiration, assuming either a 5% or 10% annual gain in the share price. The other uses something called the Black-Scholes formula. It's a complex model that measures the initial expected value of options partly based on certain economic assumptions that may damp stock prices down the road.

But in the revved-up world of Internet stocks, some compensation experts say, both approaches clearly undervalue the paper wealth many executives are amassing. Using a novel but disputed approach, search firm SpencerStuart came up with the estimate that Ms. Whitman's 7.2 million eBay options had a value of nearly $1.2 billion on paper. And that figure makes her the nation's highest-compensated Internet leader, concludes SpencerStuart's recently released study of 1998 cash and option awards for 486 senior officials at about 70% of all public Internet concerns.

To adjust for high volatility, the New York search firm measured options' value by averaging the stock prices of those 155 Internet businesses over three days earlier this year: April 6, May 6 and June 18.

SpencerStuart is a major headhunter with a sizzling Internet practice, and it will undoubtedly tout its findings to negotiate bigger executive pay deals. Still, its approach -- using a somewhat arbitrary measure, but involving three days of actual stock trading -- looks more grounded in reality.

EBay's latest proxy statement, for instance, reports that Ms. Whitman realized her $42.7 million paper gain from exercising those 7.2 million options just before its wildly successful initial public offering at $6 a share last fall. The online auctioneer had granted them at seven cents a share when the Hasbro Inc. manager took the No. 1 job early last year.

The $42.7 million gain fails to reflect the subsequent trajectory in eBay's stock price, which hit a 52-week high of $254 and closed Friday in Nasdaq trading at $133.50, up $12.0625. Ms. Whitman, 43 years old, declined to comment.

Executive Compensation Advisory Services, a consulting company in Alexandria, Va., pegs the Whitman options' initial value at $450,223, based on a modified version of Black-Scholes developed for a coming book on high-tech pay. "All option valuations are guesstimates at best," concedes Carol Bowie, publications director of the company.

The SpencerStuart method "is kind of silly," argues Alan Johnson, managing director of New York pay consultants Johnson & Associates. "It's not a valuation. It's a projection," he says. Ms. Whitman "bought a lottery ticket at seven cents a share, and now the ticket is worth $1 billion. Was the lottery ticket initially worth $1 billion? Of course not."

"We call this a commonsense approach toward valuing these things," retorts James Citrin, a SpencerStuart managing director. "It's a hybrid between what you got and will get in the future," he explains. "It will fuel the continued debate and jaw-dropping over the value of the most successful Internet CEOs."

Indeed, the options boom is already spurring many major company executives to seek bigger packages from young Internet ventures mulling an initial public offering. They're disregarding the SEC-mandated evaluation methods and instead using private calculations to wrangle a large enough equity stake that they could someday become a dot-com gazillionaire, too.

In the past, chief executives who didn't found their companies typically received options to buy between 4% and 6% of a start-up's shares, pay specialists say. Compare that holding with Robert Zollars's options stash: He confirms he got options to acquire 10% to 12% of Neoforma Inc. when he became chairman, president and chief executive in June.

The closely held Santa Clara, concern catalogs and sells medical supplies online. Mr. Zollars, 4l years old, previously was a $350,000-a-year executive vice president of Cardinal Health Inc., a big distributor of medical products that also manages health-care data. He figures his exit cost him several million dollars of unexercisable Cardinal options.

"There had to be a meaningful upside to me and my family, because I was taking a risk," the new CEO recalls. "In the Internet world, you are starting from scratch." He expects to take Neoforma public someday.

Armed with SpencerStuart's options analysis, "a number of people out there will double or triple what they think they're worth. But they may not be worth double or triple," says Rudy Puryear, president and CEO of Lante Corp., an Internet consultancy in Chicago that also plans to go public.

Lante, whose backers include Dell Computer Corp., attracted Mr. Puryear, a $2 million-plus Andersen Consulting partner, in late June with an options package that would give him about a 7% stake, according to informed individuals. "There are a number of places I could have gone where there was an opportunity to cash in [options] pretty quickly," Mr. Puryear says. "Compensation was one of maybe five factors that made Lante a really good fit."

But as he recruits senior managers, the 48-year-old Lante leader is concerned about the immediate-gratification factor. "I want to attract people who don't want to get rich overnight," he says. "This is not a casino."

His strategy: woo prospects from traditional service firms and Internet upstarts whose "stock price isn't doing so well."

Help Wanted

Celestial Seasonings, the herbal-tea maker, wants a director of merchandising to sweeten up its business. This fall it plans to launch a Direct Division, which will develop its catalog operations, its own stores and eventually an e-commerce business. The new hire will work at headquarters at 4600 Sleepytime Drive in Boulder, Colo.

Founded in 1969, Celestial Seasonings has become the largest U.S. producer of herbal teas, with $108 million in annual revenue. Joseph Carideo, a senior partner at New York search firm Thorndike Deland, poured out details of the new position:

What will the merchandising director do?

"We're looking for someone who can leverage the healthy image that most tea drinkers have of Celestial Seasonings into the creation of nontea products. He or she will have to come up with these ideas, such as bath and products that promote the natural and soothing feelings of the teas."

Who would be an ideal candidate?

"The company is looking for someone who has an affinity for the outdoors and a more 'natural' lifestyle. The aggressive, New York type will not fit in here. But this doesn't mean we're interested in flaky people."

What if a promising applicant dislikes tea?

"That's all right -- they don't have to like it. But it'll be hard to find someone who isn't a tea drinker."

What's the pay?

"At least $100,000."

Any special perks?

"Location! The office is located at the foothills of the Rockies within a great college town. And, of course, free tea is available all day long in every form: iced tea, hot tea, chai ... "

--Kemba J. Dunham

The Jungle/By Joann S. Lublin

A Tough Fit?

Levi Strauss & Co. may soon wrap up its nearly eight-month search for a No. 2 executive. The San Francisco jeans maker has narrowed the hunt to a few apparel and retail-industry insiders and outsiders, with a decision likely this month, people familiar with the search say. A leading contender: A top-level PepsiCo Inc. executive.

The newcomer will succeed 54-year-old Peter Jacobi, who announced his retirement in January. During his two years as president and chief operating officer, the company lost market share in its core denim jeans.

Levi Strauss had hoped to complete the search by Mr. Jacobi's departure in early June, a spokesman says. But "we want to find the best person possible." Tropicana ex-CEO Ellen Marram was among executives initially considered. Ms. Marram, who couldn't be reached for comment, took the helm of efdex Inc., an Internet-based commodities exchange.

Several department-store chain executives have spurned Levi Strauss's overtures, an uninvolved recruiter says. SpencerStuart has the search.

Redirected Efforts

Merger mania and smaller corporate boards have curbed the volume of director assignments. That's partly why several search firms are expanding or introducing board-consulting services.

SpencerStuart, which has the biggest U.S. board practice, launches a Web site Friday called Initially, it will provide expert essays about transitions involving directors and business chiefs.

TMP Worldwide Inc. probably will roll out similar online advice next year on, its popular job-search site, says Robert Pearson, head of TMP's newly revamped global board practice. He previously ran recruiters LAI Worldwide Inc., which TMP acquired in late August. Russell Reynolds Associates Inc. has just introduced board-consulting services. "It's a matter of trying to position yourself in the [changing] market," explains John Hawkins, who runs its growing board practice.

Boardroom Consultants, a boutique search firm in New York, derives at least 40% of its revenue from counseling boards, up from "very little" in 1994, reports Roger Kenny, managing partner. The firm's revenue was flat in the first half of the year, he says, and probably would have been a lot lower "if it hadn't been for our governance consulting work."

The Going Rate

Strings Attached

Joseph Galli landed a generous compensation package when he became Inc.'s new No. 2 executive. But the biggest rewards will come from the fast-moving Web retailer if he stays put -- for a long time.

Mr. Galli was promised $5 million in signing bonuses over two years. If he quits or gets fired after little more than a year, his employment contract states, he must repay Amazon a substantial chunk of that.

His accord includes other so-called golden handcuffs. He received two option grants -- with prolonged, 20-year terms -- to acquire 1.96 million shares.

He is also eligible for a separate bonus of as much as $20 million if Amazon's stock price is weak and certain options have little value. He can't begin collecting on the bonus until late June 2003. And Amazon won't finish paying the $20 million unless he remains employed there for 11 years.

"Joe's staying with us for 11 years will be great for the company and for our shareholders," says Russell Grandinetti, investor-relations director.

Landing Time

The higher your salary, the longer it takes to find a new job if you're laid off, right?

Not always.

People with salaries below $40,000 take an average of 98 days to find work. But those earning between $60,000 and $79,000 get re-employed within 89 days -- faster than any other pay level, a survey concludes.

OI Partners, outplacement consultants in Parsippany, N.J., polled 500 displaced professionals and managers. Companies "want people with more seasoning," and lower-paid ones tend to be less experienced, says Paul Sniffen, an OI managing partner. About 54% of those with the shortest unemployment obtained jobs again with pay in the same range, $60,000 to $79,000.

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