Director pay at Internet companies.

• Author: CHASE, DAVID

Since cash compensation is typically not provided, directors' pay packages are being oriented to highly leveraged equity opportunities.

SWEAT EQUITY is nothing new. Providing equity to a start-up company's founding management has become commonplace. In fact, it is the board of directors' primary means of attracting and rewarding talented executives at start-up companies. In recent years, even the directors of start-ups have received equity, too. Now, however, Internet companies are paying equity compensation levels that are higher than ever before. The use of equity for directors seems to say: "If a little is good, a lot must be better."

There is no doubt that directors in a start-up Internet organization are often relied on to formulate the corporate vision, set its values, and generally guide its strategic direction. The "footprints" that a start-up's directors leave on their organization are usually larger than those left behind by the directors at an established company. Most Internet companies are, or recently were, fast-growing infants and therefore need a significant amount of both strategic and even tactical guidance. Therefore, a great deal of an Internet organization's success can be attributed to the actions and decisions of its directors. Given this, it is not surprising that its directors participate in equity compensation programs to an extent that is, in the e-language of the cyber-'90s, "extreme".

Though the amounts are greater than in other industries, there are business reasons for providing directors with significant equity compensation. From a business perspective, not only does a policy of providing significant equity-based pay, in lieu of cash, conserve crucial funds during the initial stages of a company's life, but it also impresses upon prospective investors that the board's interests are aligned with their own. Both of these points are critical for companies that are trying to navigate their way to "the ultimate goal," which is usually an IPO or an acquisition. Similarly, the enormous business risks that are faced by any start-up company necessitate that their equity packages must be larger than they would be at an established company.

A winner-takes-all trait

Additionally, Internet companies' leveraged, equity-heavy director compensation packages reflect the "defining traits" of the Internet economy. Specifically, the Internet is new and it is growing from a counterculture novelty to an economic force at breakneck speed. Those individuals and companies that can keep up with this pace, or get there first, stand to reap great wealth. This fast-paced, winner-takes-all trait creates a bit of a gambling mentality. As a result, Internet directors' pay is a "bet" on the dream of building a new breed of company. Concomitant with the atmosphere of the e-economy, it is much more valuable to have ownership of a finished product than it is to reap small rewards during the initial phase(s). In other words, since the Internet relies upon turning a small idea into a huge business, compensation that provides a piece of the forthcoming business is more valuable than pay that plunders the small idea. In fact, the high-risk, high-reward compensation arrangements that are exhibited by nearly all Internet organizations are in many ways reflective of their business strategies. Like many members of management, directors are willing to trade cash compensation in favor of significant equity stakes that, if all goes well, could become extraordinarily valuable.

As far as pay is concerned, there is a...