Sharing your online bonus

If a week is a long time in politics then a year is an eternity in business, writes Philip Whiteley. Remember the brain drain...

If a week is a long time in politics then a year is an eternity in business, writes Philip Whiteley. Remember the brain drain from blue-chip firms to the start-ups?

Part of the attraction was the buzz of building a new company but pay schemes played a significant role in luring people to the new economy. There was an unwritten clause between the lines of the employment contracts that said, "This will make you rich."

Both marketing-led dotcoms and technology companies made huge stock offers to induce talented people to take the risk. Some packages constituted more than 80% shares and share options.

Desperate to stem the haemorrhage of staff, blue-chip companies increased the share offerings to managers and software experts - especially in the Internet divisions. We all know what happened next.

Now that many new economy shares are bumping along at less than 1% of their peak value the brain drain has gone into reverse. In response, the start-ups that still have cash have increased the proportion of remuneration in the basic salary.

A recent US survey by compensation and HR consultancy William M Mercer showed that differences in pay schemes between traditional and new economy firms have narrowed and, for some, these differences have disappeared.

Headhunter Karen Hope, director of London-based search agency HEDS, confirms the trend. "People are prepared to sacrifice basic pay to a certain extent, but when the proportion of stocks starts getting high there is a pull back to bring up the basic because of the risk factors. Promises, add-ons and share options are increasingly seen as being by no means certain to happen," Hope explains.

End of story? Not quite. Use of shares by dotcoms may be falling but the rise continues elsewhere - the new economy firms have not been the only contributing factor.

The Mercer report shows that the proportion of the package made up by salary for someone at vice-president level in the Internet division of a major firm is the same for the equivalent in a small technology company, but it is just 41% in both sectors: long-term incentives such as options comprise more than half of total remuneration.

This is a shift for traditional employers. Even at more junior levels the trend is clear. A middle manager in the Internet division of a large corporation receives 19% of remuneration in bonuses or stock.

The other force at work is the pursuit of employers to find the best approach to performance-related pay. Companies have found that getting managers to jump through hoops to receive bonuses is not the same as tying their behaviour in to the organisation's objectives.

A new publication by pay experts Michael Armstrong and Duncan Brown - New Dimensions in Pay Management - charts how employers are recognising that remuneration policy cannot be separated from strategic management.

Companies are starting to look at the strategy and then use that to inform their approach to how people should be paid. The result is a sophisticated approach that rewards achievement of financial targets, managing people and other skills.

At executive level, the package will include offering shares or options. The main objective of the top team is to bat for the shareholders, so the imperative is to ensure that their interests are aligned.

Only a few people have become rich by joining a dotcom. Many more are making their fortune in the Internet divisions of established firms.

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