The 1995 Soft-Letter executive compensation survey.

Looking at the headlines of the last few months--the Netscape IPO, IBM's $3.5 billion buyout of Lotus, the tidal wave of Windows 95 sales--it's easy to see why so many people believe software is a magic money machine. And it's not surprising that the paychecks of the executives who crank the money machine should be equally fascinating. Like Hollywood stars and major-league athletes, software entrepreneurs seem to deal in a special kind of economics, translating intangible talent into bundles of cash.

Of course, the reality is often a good deal less glamorous. Compared to the top executives of Fortune 500 companies, most software executives earn relatively modest paychecks. Last year, in fact, more than half of the CEOs of publicly-traded PC software companies earned less than $300,000 in combined salary and bonus, and it took just $500,000 in earnings to qualify as one of the industry's ten best-paid executives (see chart).

Moreover, executive salaries in the PC software industry tend to be volatile, in part because of the large role played by performance-based incentives. The 234 executives in this year's Soft-letter Executive Compensation Survey earned $57.4 million in annual pay; of this amount, more than a third (34%) came from bonuses, commissions, and other variable payments. The ten best-paid executives in this year's survey were even more dependent on incentive compensation (or, in the case of top-ranking Philippe Kahn, on a one-time $1.3 million severance payment): A hefty 58% of their total pay came from bonuses and other non-salary compensation.

An even more important variable in the compensation equation is so-called "long-term" incentive pay (chiefly in the form of stock options that are recognized as compensation when they are converted to cash). This year, long-term incentive pay added $75.7 million to the earnings of the executives in our survey, representing 57% of their aggregate income for the year. Long-term compensation made an even larger contribution to the incomes of this year's ten best-paid executives; collectively, they earned $13.9 million from stock options, compared to $8.2 million in salary and bonuses.

But this long-term incentive income is not evenly distributed among all executives; there are dramatic peaks and valleys that reflect the peaks and valleys of individual company performance. Thus, only 88 executives collected long-term income during the last year, ten of whom captured more than half ($39.4 million) of the total. (In fact, four of these top ten were executives at a single company, Cheyenne Software.)

The mix of salary, bonus, and long-term compensation also varies somewhat by job title. But in general these differences are remarkably small:

                                                         Long-
                                        Salary   Bonus    Term
Chief Executive Officer (53 executives)   25%     18%      57%
Chief Operating Officer (22 executives)   19%      9%      72%
Finance & Operations (38 executives)      34%     12%      54%
Product Development (37 executives)       37%     13%      50%
Sales & Marketing (49 executives)         33%     17%      49%
International (11 executives)             27%     13%      60%
Other Senior Management (24 executives)   38%     21%      41%
      Total (234 executives)              28%     15%      57%

Finally, another useful measure of executive compensation is the number of executives whose annual earnings (salary plus bonus and other pay) increased or decreased over the previous year's level. In this year's survey, executives who scored gains outnumbered the losers by 105 to 48. But perhaps more interesting is how widely the paycheck pendulum swings for the industry's top brass: Among executives who got raises, the average increase was a hefty 30%; among those who saw their earnings shrink, the decrease was 21%. In terms of the popular carrot-and-stick model for performance incentives, the software industry's executive compensation system seems to be delivering pretty much the right results.

  TOP PAYCHECKS OF '94

 1.  Philippe Kahn, Borland                    $2,299,128
 2.  Jim Manzi, Lotus                            $909,800
 3.  Robert Frankenberg, Novell                  $836,334
 4.  Lars Turndal, Santa Cruz                    $639,362
 5.  Charles Geschke, Adobe                      $633,672
 6.  John Warnock, Adobe                         $632,585
 7.  Steven Kalman, Phoenix                      $607,000
 8.  Carol Bartz, Autodesk                       $593,986
 9.  Lawrence Probst III, Electronic Arts        $592,935
10.  Joseph Marengi, Novell                      $504,500

  TOP LONG-TERM GAINS OF '94

 1.  Carol Bartz, Autodesk                     $6,975,124
 2.  Edmund Auer, Broderbund                   $6,264,880
 3.  Charles Geschke, Adobe                    $4,481,272
 4.  Eli Oxenhorn, Cheyenne                    $4,336,461
 5.  Elliot Levine, Cheyenne                   $3,918,556
 6.  Reijane Huai, Cheyenne                    $3,364,171
 7.  Alan Kaufman, Cheyenne                    $2,769,264
 8.  Gary Land, Wall Data                      $2,631,551
 9.  Joachim Kempin, Microsoft                 $2,385,000
10.  Stephen Pelletier, Intuit                 $2,218,527