Implications of Changes in Technology Companies are Work Culture Incentive Compensation

Abstract

Recently, some compensation and benefits experts have been witnessing a renewed interest in good old-fashioned base pay as an important part of a pay mix that includes base, bonus and options. The trend is clear among executives in high-tech companies in general and high-tech start-ups in particular. The change in the compensation mix in the high-tech sector is so subtle that it has gone unnoticed by many. The implications of the change, however, are not so subtle. This article addresses the implications for entrepreneurs who invested in high-tech start-ups for quick profits from IPOs, technology stock shareholders, compensation professionals charged with developing pay plans that promote technology companies’ business objectives, and employees who hold stock options.

The impact of the high technology crisis on CEO compensation

“…Liccione [7] reports an examination of US proxy data from high-tech companies in 1998 and 1999, revealing a weaker emphasis on cash compensation and a stronger emphasis on stock options in high-tech firms in 1999 relative to executives in other industries (Exhibit 2, p. 22). He also suggests that the components of direct pay in technology companies became more like those in traditional firms after the bubble burst, with typical salaries for executives in high-tech firms rising at roughly twice the pace of those in other firms, while bonuses and option grants grew more slowly (Exhibit 1, p. 22).…”

“…Liccione [7] noted that after the crash, equity markets began to demand evidence of profitability from high-tech companies in order to justify high stock prices. This refocusing of investor objectives might also drive companies to increase the links between executive pay and profitability, though the profitability of these companies is still weak after the crisis.…”

“…One of the distinguishing features of pay systems in high-tech industries is the prevalence of stock option plans [5] [6]. Liccione [7] revealed that more than 96 percent of the direct pay of the typical technology executive came through annual bonuses and stock options. A detailed analysis of the pay of executives in these firms thus contributes to our understanding of this rapidly changing industrial environment, and also facilitates the comparison of behaviours before and after the rapid revaluation of these companies in the crisis of 2000.…”

“…This bull run came to an end in 2000, and there is some evidence that this changed investors" sentiment. Liccione [7] noted that there were changes in pay philosophy and practice in hightech firms after the crash: arguing that stock options could not effectively motivate employees to work toward business goals in this environment, and citing increasing market demands for profitability from technology firms. This evidence is not entirely convincing and little other research has been carried out that tries to identify any changes in the way that the hightech companies reward their executives post-crisis.…”