THE 1999 SOFTLETTER EXECUTIVE COMPENSATION SURVEY.

Getting a peek at the paychecks of the rich and famous (or anyone elseOs pay, for that matter) is always fascinating. As a culture, we sometimes seem obsessed by talk about prices--for groceries, for telephone service, for Internet stocks, even for garage-sale auction items. But when itOs time to put a price on an individualOs work, secrecy and privacy are the rule. In fact, salaries arenOt just about money; they are just as much a way of keeping score, of measuring self- worth. Even billionaire Bill Gates collects both a paycheck and a OperformanceO bonus, presumably because working for free might reflect badly on his value to the company.

Trouble is, all this secrecy about salaries makes pay negotiations a perennial tough challenge. The problem is especially acute in the software world, where compensation committees often struggle to define a universe of OcomparableO companies. Is it reasonable to use consumer software data to benchmark business software salaries? How much does company size (or profitability, or growth) matter? What kind of raises will keep the recruiters away for one more year? How critical are stock options, bonuses, and the endless catalog of miscellaneous benefits?

There are no easy answers to questions like these, but thereOs at least one good source of trend data--the information that public companies must disclose about their best-paid executives. As part of our annual survey of executive compensation, weOve compiled compensation statistics on 274 individuals at 56 public PC software companies--and here are some of the observations that emerge:

In the aggregate, incentive pay has become the largest driver of top- level compensation: The executives in this yearOs survey earned a total of $217 million in their companiesO most recent fiscal year. Of this amount, base salaries represent only 26% ($56 million) of total pay. Bonuses and related payments contributed another 14% ($30 million), while gains from stock options generated a hefty 60% ($131 million) of total earnings. Thus, for the statistically average executive, three- quarters of all pay depends on personal or company performance-- certainly an aggressively entrepreneurial model.

OPerformance payO is full of loopholes: Despite the software industryOs apparent emphasis on incentive pay, the line between OincentiveO and ObaseO pay turns out to be a bit fuzzy. Some companies pay bonuses only for exceptional results, but itOs clear that a significant portion of the typical bonus pool gets awarded regardless of actual performance; in fact, 90% of executives last year earned bonuses, sometimes despite major corporate setbacks (and occasional firings).

Options are losing their value as an incentive: In theory, stock options are a way to focus executives on building Olong-termO company value. But unlike bonuses, earnings from options are so haphazardly distributed that some compensation experts now argue that the connection between pay and performance has become almost meaningless. Last year, for example, 72 executives cashed in options worth $131 million; of this, almost two-thirds ($81 million) ended up in the pockets of just ten executives from five companies. Like a lottery, a few people emerge as big winners, but the average payback is negligible.

Overall pay is rising fast: ThereOs a good deal of turnover in top jobs, so only 240 executives in this yearOs survey have worked at least two full years for their current companies. Although a few of these executives saw their combined base pay and bonuses shrink last year, most collected healthy raises. The median pay increase last year was 12% for CEOs, 23% for COOs, and 18% for sales & marketing executives. Other job categories earned smaller raises--but no category lost ground (see page 19). In the end, bonuses and stock options are nice, but executives still seem to expect hefty year-to-year raises.