by John Strahinich

CIOs Make More Money Than Ever

Nov 01, 200015 mins

Reader ROI

Discover the current benchmarks for executive salaries

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1999 was a very good year for dotcom IPOs, Y2K firms, Yankee fans, French burgundies and end-of-the-millennium Top 100 lists of every kind. It was also a pretty good year for Disney CEO Michael Eisner, who brought home more than $50 million in pay, owing mostly to the raft of stock options he exercised that year.

That said, Eisner didn’t fare nearly as well as he had the year before. Running “the Mouse,” as Disney is affectionately known among its employees, Eisner earned a staggering $575.6 million in 1998—according to BusinessWeek, one of the largest scores ever by a CEO of a publicly traded company. The fact is, the ’90s were a very, very good decade for CEOs of large public companies in general: Between 1990 and 1998, their average haul skyrocketed from $2 million to $10.6 million, an increase of 442 percent.

Until recently, the vast majority of people who push a mouse for a living, CIOs included, have stood on the sidelines shaking their heads at the great, good fortunes of America’s CEOs. “Eisner makes hundreds of millions, and his CIO is lucky if he makes $500,000,” jokes Victor Janulaitis, CEO of Positive Support Review, a Santa Monica, Calif.-based IT consultancy that, among other things, surveys CIO salaries. And how lucky did Disney’s first ever CIO, Bud Mathaisel (who served a five-year stint that ended in 1990), actually feel?

“Let’s just say I made a comfortable living,” says Mathaisel, who, like most CIOs—and most Americans—would sooner confess to fudging their golf scores than reveal how much they’re paid.

These days, however, if CIOs are keeping mum about their paychecks, at least it’s no longer out of a sense of inferiority. Thanks to the rapid emergence of the new economy and the concomitant rising expectations for IT, CIOs are increasingly being viewed and recruited as key corporate officers, expected to work closely with CEOs, COOs and CFOs to set and implement company strategy. Not surprisingly, as these CIOs pull up their chairs to the corporate power table, they’re demanding—and getting—bigger, fatter, healthier slices of the American pie.

Striking It Rich

Survey after survey shows CIO compensation not only growing dramatically during the past two years, especially in midsize and smaller companies, but often outpacing that of CFOs, the next species up the corporate food chain. (In fact, some headhunters report instances of CIOs overtaking CFOs in total compensation.)

According to William M. Mercer’s “Executive Compensation Survey,” the average pay for CIOs (not including long-term compensation) at small companies (revenues under $5 million) jumped from $106,000 to $145,900 between 1997 and 1999, an increase of 38 percent. At midsize companies (revenues between $3 billion and $5 billion) during that period, it rose from $143,900 to $193,800, a 35 percent hike. CIOs at large companies (revenues greater than $5 billion) saw their pay go from $207,700 to $248,900, a 20 percent increase.

(By way of further comparison, CFOs in the same survey didn’t do nearly as well. At small companies, their pay went from $177,900 to $198,700, an increase of 12 percent; at midsize organizations, it rose from $302,100 to $366,700, a 21 percent hike; and at large companies, it inched up from $533,900 to $550,100, a pitiful 3 percent increase. Just the same, Joyce Cain, a principal of William M. Mercer, the New York City-based HR management consulting firm that did the survey, cautions against reading too much into those numbers, attributing them to a possible higher than usual turnover of CFOs in the survey sample, among other things.)

The higher percentage increases at small and midsize companies hardly means that CIOs at Fortune 1000 companies are being left behind. Far from it. The CIO at one investment company took home almost $12 million last year. And such is the demand for CIOs in general that companies are sweetening the pot with six-figure signing bonuses, larger blocks of stock options, accelerated incentive plans, imaginative relocation packages and more.

Regarding the disparity in CIO pay increases between small and large companies, various people offer various interpretations. Cain believes it comes down to a question of Darwinian self-preservation: The more intense the company’s struggle for survival, the fatter its CIO’s paycheck. “As these jobs grow in importance,” she says, “the smaller companies are looking to retain their people so that they don’t get hired away by the larger companies.” Janulaitis of Positive Support Review, which released a survey last January (updated last May) showing a similar trend, contends that CIO pay in large, mature companies has simply peaked. “The real increase for CIOs is in medium to smaller organizations, where they’re still leveraging the technology across the company,” he says.

As today’s compensation packages increase in size, they are also growing in complexity, raising new questions about negotiating strategies and bargaining-table etiquette. For instance, should one hire a lawyer-agent to sit down with a prospective company and hammer out the terms of the deal? What exactly is the difference between stock options and restricted shares, particularly at tax time? (See “At the Bargaining Table,” page 192.)

While the current market has put CIOs snugly in the driver’s seat during negotiations, the best still seem driven more by the opportunities presented by a prospective employer than by the snappy company cars they could get to tool around in. Lest any be blinded by the very real prospects of instant wealth, headhunters and experienced CIOs alike caution against letting a new company’s largesse distract from asking the tough questions about its long-term commitment to IT, e-commerce and the like.

Still, it’s nice to be loved, and it’s fun to be wooed, especially when so many companies are putting so much money where their mouths are. “It’s definitely a seller’s market,” says Rich Brennen, managing director of the IT practice at Chicago-based headhunting firm Spencer Stuart. “A talented CIO has the opportunity today to pick among multiple situations.”

Adds Mathaisel, who went from Disney to Ernst & Young to Ford Motor Co. and is now with Solectron Corp., a high-tech manufacturing and service company in Milpitas, Calif., “There’s a distinct shortage of good CIOs, and it’s even more acute than it was two years ago [because of the dotcom startups and the advent of e-commerce]. Companies need to compete [for CIO talent] against all the opportunities that exist out there.”

Who’s Getting What

Back in the late 1980s, DuWayne Peterson, who was then with New York City investment house Merrill Lynch & Co., achieved a grudging fame as the first-ever million-dollar CIO. Peterson, who now runs his own consulting company, DuWayne Peterson Associates, in Pasadena, Calif., says he was outted when someone in the media glommed onto Merrill Lynch’s annual proxy statement, which included his annual salary and bonus. “It was a big deal. I got calls from other CIOs thanking me for raising the bar,” Peterson proudly recalls. “Now it’s sort of ho-hum. There are a lot of multimillion-dollar CIOs out there.”

Just ask this year’s reluctant heroine, Leslie Tortora, CIO at another New York City investment firm, The Goldman Sachs Group. If Vanity Fair magazine can anoint actress Gwyneth Paltrow the new “It” girl of Hollywood, it may be time to proclaim Tortora the “IT Girl of the New Economy.” Goldman Sachs, which went public in 1999, filed its proxy statement this past February, showing that Tortora earned $600,000 in salary last year—plus $7,347,523 in bonuses. She was also credited with another $3,840,035 in long-term compensation. Total package: $11,787,558. (Interesting footnote: That was the same sum, to the dollar, that Goldman Sachs’ CFO took home.)

You don’t have to be working in the financial services industry to pull in the big bucks, however. After a long stint with AT&T, a couple of shorter ones running his own companies, and yet another with New York City-based Salomon Smith Barney, Francis Dramis Jr. became BellSouth’s CIO in December 1998. Not only did Dramis pocket a $200,000 signing bonus, records show he earned another $992,000 in bonuses in 1999 (including a second installment of $200,000 as part of his signing), plus $431,300 in salary, plus another $240,000 in long-term compensation. Total value: $1,863,300.

Why is corporate America throwing so much dough at CIOs? Dramis points out that he brought more than technology expertise to BellSouth’s table. “I had an opportunity to shape the direction in how [BellSouth] brings information services to the new economy,” he says. “I brought not only an IT perspective but also the experience of having run a consulting practice.”

Information Technology Association of America (ITAA) President Harris Miller seconds Dramis’s view, pointing out that today’s CIO is quite a different animal than yesterday’s. As we all know, the modern CIO, as Miller says, “is involved in the strategic planning of the company because all its business operations revolve around the Internet and the network.”

To buttress that point, Miller adduced an ITAA panel discussion last October wherein the assembled CIOs were asked how much of their job performance depended on their technology know-how and how much hinged on their overall business skills. The consensus: At least 80 percent of their performance depended on the latter. “Customer relations, internal operations, supply strategies and so on—these are the things they have to focus on,” Miller says. “They can always hire someone to find out which software program is best.”

David Brown, who leads the information officers practice for the New York City-based Russell Reynolds Associates, refines that idea even further and adds a wrinkle of his own. Any disparity between one CIO’s compensation and another’s has to do with the mettle of the CIO, not the size of the company. “The people commanding the really big packages share three key traits: leadership ability, business acumen and technology know-how,” says Brown. “You’re seeing a split between the competent CIO and what we call the ’tri-athlete,’ who combines those traits.”

Inside the Compensation Package

But maybe you’re not a tri-athlete. No matter. Headhunters freely admit that demand is so high—and the talent pool so thin—that most any CIO can find gold in them thar corporate hills. Indeed, to hear recruiters and others familiar with the job market tell it, a CIO couldn’t pick a better time than now to come down with a severe case of wanderlust.

Start with base salaries. Brennan of Spencer Stuart says that as a rule, the large financial services companies—banks, brokerage houses, mutual funds and investment firms—continue to pony up the heftiest salaries, ranging from $300,000 to $800,000. Next, he says, come the big manufacturing concerns, which typically offer from $250,000 to $400,000. Size is also a factor in determining base salaries, he adds, with most midsize companies (those with revenues of around $1 billion) putting between $200,000 and $250,000 on the table. As for dotcoms, Brennan says CIOs used to be content with total cash compensation of between $200,000 and $250,000, plus an equity stake between .75 percent and 1.5 percent of total shares. “Now,” he reports, the typical CIO’s “cash demands in dotcoms are in many cases higher because of their higher failure rate.”

To sweeten the pot further, companies are also anteing up more generous signing bonuses than ever before—ranging as high as $400,000 in some cases, according to Brown of Russell Reynolds—and no doubt higher in others. But don’t expect all of it on the front end, he adds. The bigger the signing bonus, the more likely it is to be spread out over several years as an added incentive for the CIO to stay with the company.

Speaking of incentives, according to Brennan they are typically capped at rates ranging between 40 percent and 70 percent of base salaries and stock options, although recruiters say companies are increasingly throwing stock grants, or so-called restricted shares—outright gifts of stocks—into the mix. The way it works is the company will set aside a block of, say, 10,000 stock options or restricted shares into an escrow account for the CIO. The company and the CIO will then agree to some combination of corporate and individual performance goals—stock prices, revenues and profits for the former, and completing projects on time or meeting milestones on a long-term development effort for the latter—for releasing those shares.

“I’m going through this exercise with my boss right now,” says Mathaisel. “What are the specific performance goals that can be measured sufficiently well enough? In my case, it might be the completion of a satisfactory software product that is well received by a [Solectron] business partner.”

If the target is reached, 40 percent to 70 percent of the base salary, options or restricted shares—or a mix of each—is awarded to the CIO. Even if the CIO falls short of the target, the incentive bonus is generally prorated to reflect the degree of relative success. (For today’s CIOs, the glass is always half full.) On the other hand, when CIOs exceed their goals, the sky is literally the limit, says Beverly Lieberman, of Halbrecht Lieberman Associates, a Stamford, Conn., firm that specializes in recruiting CIOs and CTOs. According to Lieberman, CIOs are negotiating virtually uncapped bonuses these days, netting them as much as two and three times the usual incentive awards when they exceed their targets.

When stock grants come into play, however, the picture for the CIO can become muddled. “The world of negotiations is getting more complex,” says Dana Deasy, a CIO with Siemens, the German global manufacturing giant. “You have all sorts of tax issues surrounding short- and long-term compensation.” And Mathaisel raises a red flag: the Internal Revenue Service treats those stock grants as straight income. Should the CIO hold them long enough to realize a gain, the feds will take a bite. Not to worry overmuch, though. Many companies will also pick up the tab for a financial planner—”to help with tax avoidance for all this newfound wealth,” Lieberman jokes. They will also pay for country club and health club memberships, to say nothing of term life insurance policies worth up to three times their salaries and whole life insurance policies that travel with them when they move on to the next company. Should CIOs not work out with their new companies, they can always fall back on severance agreements that guarantee a year or more in salary, plus full relocation expenses back to the CIO’s home base. In the meantime, many have to make do with so-called transition packages that pay them thousands a month to help decorate their new digs.

Where startups are concerned, says Brian Lenihan, a technology specialist with Boston law firm Hill & Barlow, CIOs would be well advised to seek change-of-control agreements similar to those traditionally accorded CEOs, COOs and CFOs, which accelerate as much as 50 percent of their unvested options in the event the company is acquired. Go ahead—make my day, counters Dave Nerrow, a general partner with CMGI@Ventures, the venture capital arm of David Wetherell’s CMGI in Andover, Mass. When dealing with him, Nerrow says, the best “they’ll end up getting is 25 percent.” Then again, they could always try Lieberman, who has helped CIOs negotiate change-of-control agreements guaranteeing between six months’ and two years’ salary.

If the CIO still isn’t ready to sign on, that’s when some outfits really pull out all the stops. “One company in Palo Alto actually paid for the relocation of an in-law because the in-law was the primary baby-sitter for the [CIO’s] family,” says Janulaitis. He also heard of a company that found a job for the spouse of its new CIO—not to mention the winery in northern California that’s paying graduate school tuition for the spouse of its new CIO.

Lieberman can top those stories without breaking a sweat. She worked with a company which, as a condition of closing the deal with a prospective CIO, agreed to lean on some influential board members to lean on the admissions people at a local medical school to enroll the candidate’s wife. “And it worked,” says Lieberman, hesitating only a moment before adding: “She was well qualified, I assure you.”

Of Course, Money Can’t Buy You Love

For all the lucre CIOs command nowadays, headhunters like Brennan insist that money takes a backseat to higher-minded motivations. “For the best people, opportunity is the overall driver—that and the quality of the company,” Brennan says. “The third driver is the segment they’re playing in. If you’re in the PC disk-drive segment, that’s a hard segment. On the other hand, if you’re in a high-growth segment like networking, that’s more attractive.”

Along those lines, Mathaisel says CIOs shouldn’t hesitate to give prospective companies the deep frisk before signing on. Mindful of a CIO friend who recently left a Fortune 500 company to join a startup, only to be let go in a subsequent reorganization, Mathaisel says, “One thing a CIO must do is engage the truth and staying power of management claims about their commitment to the strategic use of technology. There are clues to this. Where does the CIO report, and how often does the CIO take part in strategy meetings? How engaged is the board of directors? Have IT people been rotated and promoted into strategic functions?”

Headhunters also warn against CIOs overestimating their worth. “There’s a sense that because they’re in the driver’s seat, they can demand outrageous sums,” says Lieberman. “Some people need everything front-loaded. That can be onerous to a company and kill a deal. If you’re a hot shot, prove your worth.”

By the same token, says BellSouth’s Dramis, CIOs shouldn’t shortchange themselves, nor their power to change their little corners of the world. “My main advice to everybody is, if you’re not having fun and making a difference, go someplace else.”