Linda, interesting article in today's WSJ re compensation for top execs at CMGI.
Fortunately or not, a little bit of oversight by the CMGI board of directors may mitigate any conflicts of interest. For the most part, the market appears to have accepted the arrangement.
Unusual Compensation Agreement
Benefits the Top Brass at CMGI
By MARK MAREMONT
Staff Reporter of THE WALL STREET JOURNAL
CMGI Inc. has achieved fame for its hugely lucrative Internet investments, from Lycos Inc. to GeoCities. Less well known is the novel way CMGI rewards its top brass.
Chairman David S. Wetherell and a handful of other executives of the Internet conglomerate have already been given shares valued at hundreds of millions of dollars -- and stand to gain more -- from an unusual compensation arrangement that lets them share directly in the company's investment gains.
The compensation setup, which is in addition to CMGI's stock-option program, entitles the executives to between 20% and 22.5% of the company's profit from investments it makes in Internet firms through a venture-capital arm. Thanks to CMGI's prowess in spotting promising Web start-ups, the arrangement has proved extremely lucrative.
It also stands out as one of the most extraordinary windfalls in all of corporate America because Mr. Wetherell and his colleagues are reaping the kind of rewards usually reserved for high-tech company founders or the venture capitalists who fund them.
Partners in a venture-capital fund, for example, commonly allocate a hefty percentage of investment returns to themselves. But at CMGI, a publicly traded Internet-investment company, when top executives pocket big gains from the venture-capital arm, it deprives CMGI shareholders of those gains.
For his role as a partner in the venture arm, Mr. Wetherell says he has received "a few hundred thousand shares" of Lycos stock, and has so far sold shares netting him about $15 million. He could gain another $70 million or more from the recent sale of GeoCities to Yahoo! Inc. Another CMGI executive, Peter H. Mills, received a similar amount of shares, according to Mr. Whetherell. (Mr. Mills didn't return calls seeking comment.)
Andrew J. Hajducky III, CMGI's chief financial officer and a participant in the profit-sharing plan, says the plan has produced huge returns for shareholders and was designed to attract and motivate executives. Mr. Wetherell says that he is focused on earning money for shareholders.
But some investors and industry executives say CMGI's dual pay plan has created the potential for conflicts of interest. One concern is that Mr. Wetherell and the other profit partners may have an incentive to steer investment deals to the venture-capital arm, where they would get a larger share of any gains than if CMGI were to make the same investment directly.
James Callinan, a fund manager at RS Funds in San Francisco who owns about 400,000 CMGI shares, says he has never liked the profit-sharing arrangement, although he calls Mr. Wetherell a "genius." Mr. Callinan, a longtime CMGI investor, says shareholders might be better off if Mr. Wetherell and his partners didn't take the profits for themselves. "They've been able to make money both ways," says Mr. Callinan, referring to the mix of direct profits and stock options.
Originally an educational direct-marketing company, CMGI, based in Andover, Mass., expanded rapidly into technology. In 1995 it established its separate venture-capital arm to invest a sudden windfall from an asset sale and to keep its investments separate from its operating holdings.
CMGI invested all the money, about $38 million, into a new venture fund called CMG@Ventures I. Seven CMGI executives, including Messrs. Wetherell and Hajducky and Mr. Mills, the managing partner of CMGI's venture-capital arm, were made partners of the fund and were given a combined 22.5% of any investment gains.
'Personal Matter'
CMGI now runs three funds. Mr. Hajducky declined to provide any figures on the amounts he and the other partners in CMGI's 100%-owned venture fund have taken home, saying the company doesn't keep those calculations. "It's really a personal matter, not a public disclosure item," he said.
Bill White, CMGI's head of marketing and strategic operations puts the company's gains on its first two venture funds at about $1.6 billion, not including the partners' profits. That would indicate that the partners stand to gain about $400 million. However, the real gains for the partners could change because Mr. White's calculations were based on current share prices. Mr. Hajducky says about half of the partners' share has already been paid to them, while the remainder is still unvested.
On top of the profit-splitting arrangement, CMGI says Mr. Wetherell currently owns 17% of CMGI shares, now valued at about $1.3 billion.
Some shareholders are satisfied that the pay plan is fair. Fred Kobrick, chief executive of Boston-based Kobrick Funds, said he "wasn't troubled" by the setup. Internet investing is a fast-moving, high-risk business, he said, and Mr. Wetherell and his team deserve a venture-capital type of reward, especially given their incredible track record. "We'll all make out much better if he does well," Mr. Kobrick said.
Still, the dual structure presents CMGI with some knotty questions when an investment is being considered. Gregory M. Avis, a venture capitalist and former CMGI director who left the board in 1997, says he was always concerned about the potential for conflict of interest. "If you see an opportunity, is it an @Ventures deal or a CMGI deal?" he asks. Mr. Avis adds that the line seemed to be fairly clearly drawn while he was on the board, and he can't recall any instances in which the conflict actually presented problems.
Mr. Hajducky said he had not given any consideration to the possible conflicts. Asked how CMGI allocates investment opportunities, Mr. Hajducky says that CMGI generally invests directly in companies in which it would own a majority stake, while @Ventures typically acts more like a venture-capital firm and takes minority stakes.
But that wasn't the case with the lucrative Lycos deal: @Ventures originally took an 80% stake in the Internet portal. Mr. Hajducky says the Lycos deal was brought to CMGI by one of the @Ventures partners (who has since left the company), and it would have been unfair to deprive him of the potential gains by making the investment through CMGI directly. "I was fortunate to get 77.5% of that fantastic opportunity" for CMGI shareholders, he says.
CMGI has formalized its allocation procedures for the third venture fund, which has outside investors, including Microsoft Corp. Mr. Hajducky said. Under the new policy, CMGI's board has the final say as to whether a particular transaction is a CMGI deal or an @Ventures deal.
In recent months, CMGI has been contemplating a bid for Lycos, in which it still controls an 18% stake, according to people close to the situation. But that could get tricky because CMGI owns most of its Lycos stake through its venture-capital arm, which is holding many of the shares as unvested profits for the partners.
If such a bid were made, CMGI would want to pay the lowest possible price for Lycos, while the venture fund might want to get the highest possible bid price. "Is @Ventures a seller, or is CMGI a buyer?" asks Mr. Avis, who believes such a situation would "clearly be a conflict."
Mr. Hajducky says CMGI has not examined whether there would be a conflict of interest or how to deal with it, saying "I don't spend time looking at hypotheticals." He adds that CMGI's board -- not the @Ventures partners -- would vote the unvested Lycos shares currently held by @Ventures.
Mr. Wetherell is both a CMGI board member and an @Ventures partner. Asked if he would recuse himself from a CMGI board vote on a Lycos bid, Mr. Wetherell says: "I'd have to."
Mark |
