Executive compensation is difficult enough for a mature company. But when it comes to a start-up – especially a start-up in a new industry – how do you compensate the top executives?

 

Executive compensation is often based on a combination of sales, profits, growth of sales and profits, cash flow, stock performance, return on investors’ capital, return on total assets as well as other quantitative and qualitative factors. There’s always an element of judgment, but there are usually numbers to support the board’s compensation decisions.

 

Unfortunately, executive compensation for start-ups and immature companies is less reliant on the numbers because quantitative results are often elusive.

 

Online Jewelers’ Compensation in A Close Range

Besides executive perks such as automobiles and health insurance, top executives also have an opportunity to earn non-cash compensation. For example, stock options can provide dramatic upside potential if the publicly traded stock of their company hits pay-dirt, especially if Wall Street falls in love with the company and the price rockets upward. That’s appropriate, especially for start-ups.

 

Source: Companies

 

Online Jewelers’ CEO Pay Well Below Store-Based Jewelers

When the pay scale for the chief executive officer of online jewelers is compared with the pay scale for store-based jewelers, the online CEOs appear to be woefully underpaid, as the graph below illustrates. However, non-cash compensation levels – primarily stock options – provide dramatic upside potential for online jewelry CEOs.

 

Source: Companies

Online Jewelers’ CEO Cash Compensation

The table below summarizes cash compensation for the chairman/CEO of the online jewelers for the past three years. In addition, the table summarizes recent sales and profit (or loss) data for the companies. Finally, the table notes “Other Compensation” which consists of non-cash compensation. Besides stock options, “other compensation” consists of payment of insurance premiums (health care, life, split-dollar, and other forms of insurance), vehicles, and other perks.

 

Interestingly, the CEO of Blue Nile, which has posted the greatest sales and profits of all of the online jewelers, has the lowest cash compensation (with the exception of Abazias which is a special situation). On the other hand, Blue Nile’s non-cash compensation is by far the highest of any of the publicly held online jewelers.

 

Source: SEC Filings

Second-In-Command Earns Much Less

After the CEO, the pay scale for online jewelers begins to fall. The table below summarizes cash compensation for the “second-in-command” – typically the president or chief operating officer – for online jewelers.

 

Source: SEC Filings

 

Chief Financial Officers Well-Paid

The Chief Financial Officer (CFO) has a very important role in most companies. He brings balance to the corporation. Most CEOs are visionaries with grandiose ideas. Their COOs (chief operating officers) are usually from the same mold. But the CFO has responsibilities far beyond simply supplying numbers to the bank and shareholders. He must make sure the company’s plans are economically viable. The most successful companies include the CFO as part of the executive team. Often known as “Dr. No,” CFOs bring a dose of reality to other corporate officers.

 

The table below summarizes cash compensation for online CFOs.

 

Source: SEC Filings

Cash Compensation Summary

The following table summarizes the cash compensation for the highest-paid officers of the publicly held online jewelers.

 

Source: SEC Filings

 

Cash Compensation for Outside Board Members

With new SEC regulations, publicly held companies are encouraged to have a majority of outside board members. The following table summarizes compensation for these board members of online jewelers.

 

Source: SEC Filings

Based on the potential liability of outside board members under Sarbanes-Oxley, we would argue that their pay is far too low. However, companies maintain Directors and Officers insurance to help reduce outside directors’ personal liability, should they be sued.

 

Non-Cash Compensation

In addition to cash compensation, the major online publicly held jewelers have compensation plans that include non-cash awards of stock options. This is a very complex area, but new regulations require accountants to put a value – actually, a range of values – on stock options for senior executives.

The table below summarizes the total compensation, including the value of stock options, for the CEOs of the online jewelry retailers. The table also summarizes the equity ownership of the CEOs.

 

Source: Company Reports

 

Total Compensation Packages

Blue Nile has the most professional executive compensation plan of all of the publicly held online jewelers. We refer readers to Blue Nile’s 2005 Proxy Statement, with specific emphasis on pages 26-28, “Report of the Compensation Committee of the Board of Directors on Executive Compensation.” Here are some highlights:

 

• Compensation Philosophy – The committee believes that compensation paid to executive officers should be closely aligned with the performance of the company on both a short-term and long-term basis, and that such compensation should be designed to attract and retain highly qualified executives. The committee believes that the executive compensation program should be competitive in the market and should align executives’ financial interest with long-term shareholder value.

• Incentive Bonuses – For 2005, 60 percent of the target bonus pool was established based on the achievement of the company’s free cash flow, with the balance based on other factors. The maximum that could be awarded to an executive officer was 200 percent of the target bonus.

• Long-Term Incentive Compensation – The committee believes that equity awards tie compensation to the long-term performance of the company and to the creation of stockholder value.

Full Compensation Study

IDEX Online Research is preparing a major study of executive compensation for jewelry retailers and suppliers. Publication should occur by early October.