Taking stock of dotcom recruitment

Less than a year ago human resource directors at bricks and mortar companies were faced with the thorny issue of how to prevent their IT staff defecting to new economy startups. Many of the defectors would be going to less well paid jobs that would demand longer hours and greater dedication, but there was always the promise of becoming a dotcom millionaire.

In the internet gold rush, short-term suffering offered the chance to become fabulously wealthy when the dotcom made its initial public offering. It was an inspirational scenario, and for a time it seemed that nothing could go wrong.

But then things changed. Companies like Boo and Clickmango became better known for their failures than for their successes. Even relatively successful firms like Lastminute saw the value of shareholder stock options collapse after the initial period of frenzied overvaluation following flotation.

But one of the lessons that has been learnt from the dotcom failures of recent months is the need for experienced business people, often drawn from old economy companies, to sit alongside the young blades that have so far been seen as the drivers of new economy firms. Such people need some reason to leave their current jobs and take a punt on a dotcom, and the staple of stock options may no longer be enough.

The party's over
"It has been a sobering time over the past four months," said James Fulton, managing director at dotcom recruitment firm eLance. "For about a year before that there was dotcom mania throughout Europe, but there has been a sobering up in general. People are looking around a lot more carefully. They are being a lot more careful about accepting an invitation from a dotcom. If a company is going to go bust in six months, then you probably shouldn't go for it."

"The staff need to have a fast, aggressive, can-do attitude," he continued. "They will have to work longer hours. That has tended to mean a younger workforce which will be both more risk hungry and willing to work those longer hours. It's probably more difficult for a 40-year-old to swap their higher salary for a stock options package and a lower salary. They will have mortgages and kids to think about as well as themselves."

According to a survey of 123 public internet companies by PricewaterhouseCooper's HR division Unifi Network, dotcom executives now want to see the colour of a company's money rather than settling for promises of future wealth in the form of stock options.

Such options are still on offer to senior management, but hard cash incentives have increased 13 per cent year on year among the three categories of job which most dotcoms look to old economy companies to fill - chief executives, chief operating officers and chief financial officers. Base salaries of respondents increased by nine per cent, but the largest increase was in cash bonuses which went up by 28 per cent.

Carl Weinberg, a principal at Unifi, said that the volatility of the stock market has made executives want a bigger guaranteed pay packet. "Executives are perceiving that there is greater risk to taking stock options and not as much upside. They want more money up front. There's still tons of venture capitalist money in the sector, so there is an ability to pay," he said.

Pressure from shareholders has also contributed to the change, said Weinberg. "From the shareholder point of view, they're more interested in controlling dilution. Also, they want to see real results and they're willing to pay cash to get them," he said.

The survey also found that the way in which companies grant executives both stock options and cash is changing. Because of the instability of the market, many companies are granting options quarterly instead of annually. Speidel noted that granting stock options periodically allows companies to average the strike prices over the year.

Many cash bonuses are now tied to more traditional business performance metrics than in the past year. "Previously, cash bonuses were often discretionary. Now, there is a greater emphasis on incentive pay and companies are using measurable metrics. These could be revenue growth or earnings related, or tied to a milestone such as completion of infrastructure," said Weinberg.

Another finding is that internet companies are granting equity to employees more carefully. "Stock options are still being used but companies are being more selective. They're determining who are the high-potential employees and which are the true game-breaker positions - the ones where having an outstanding person as opposed to an average one will make a big difference," he said.

Lessons to be learned
In the UK, there are clearly lessons to be learned from the US experience as more home grown companies consider flotation. Services giant ICL is trying to position itself as an ebusiness and, as such, needs to ensure that it attracts and retains good people. But the recent cancellation of its long-planned flotation has left a bitter aftertaste as the company's 21,000 employees realise that they will not reap the benefit of their promised stock options just yet.

Fiona Colquhoun, director of human resources at ICL, said: "I understand that people will review the direction of the business and decide what to do. We will have to look at other schemes and incentives to retain staff now that we cannot offer share options."

But there are still those who believe that factors other than cash can still make a dotcom an attractive option. Jason Kushner, co-founder of GlobalResident, said: "Salary and options are important but [are] not the only factor in an employee's decision to leave a comfortable job. Dotcoms are still giving the opportunity for employees to learn and develop a new skill set. Leaving a job for a dotcom is certainly not without its risks, but in the overall context of a strong job market the downside is still very limited."

And for those who are more financially driven there are still some big chances out there. For example, the individual chosen to head up UK food giant Diageo's business-to-business operation is in line for a package potentially worth a cool £30m based on a salary of £250,000 and a one per cent stake in the operation.