MOST ELUSIVE ELEMENT OF E-COMMERCE RACE: THE PEOPLE TO RUN IT
Byline: Valerie Seckler
NEW YORK — Where are the bodies?
Top-notch talent to feed the rapid, unpredictable growth that has emerged as e-commerce’s hallmark has quickly become e-tailers’ most sought-after asset — and one that’s the hardest to come by for most apparel players in cyberspace.
It’s also a very pricy commodity, with the news-making fortunes concentrated at the very top, and a volatile market that can produce dramatic inequality and command considerable risk.
According to the “Internet Executive Compensation Survey,” completed in August by search firm SpencerStuart, the top 10 percent of earners among chief executive officers at 486 Internet ventures received compensation averaging $191.1 million, while the bottom 10 percent received $87,251, on average.
Among the 10 highest compensation deals landed by Internet chief executives in 1998, Spencer Stuart found, were eBay’s Margaret Whitman, whose package amounted to a chart-topping $1.16 billion; Edward Lenk of eToys, whose $119.7 million ranked fifth, and America Online’s Stephen Case, who received $118 million, or the sixth-highest deal for a Net chief.
These levels offer a sharp contrast with the “Forbes 800 Compensation Study,” where the top 10 percent of ceo’s averaged compensation of $38.9 million, and the bottom 10 percent received $571,425, on average.
In large part, fashion e-tailers have been encumbered by the same hiring problems as almost every e-commerce enterprise.
For one thing, the sky-high compensation packages pulled in by top Internet leaders has forced them to come up with new forms of compensation, such as tracking stocks, that enable them to piece together pay packages that are competitive with the pure dot-coms.
The huge market capitalizations garnered by dot-coms have enabled them to use equity shares or options to attract top talent, or expand via acquisitions, far more easily than brick-and-mortar retailers, with their significantly smaller funds of capital.
And a sense of urgency, spurred by the Net’s difficult dynamics, has compelled them to make a rush at virtually any executive with a soupcon of experience online. It has also spawned a catch-phrase to describe that ill-considered process: “ready, fire, aim.”
However, as Chris Nadherny, a member of SpencerStuart’s Internet practice, pointed out, “There are a lot of people who have been unsuccessful online.
“Often, these kinds of people have been hired without any consideration for how they would fit into a company’s corporate culture or operations,” Nadherny observed. “There currently is a growing sensitivity to these issues.”
Nadherny led the Spencer-Stuart team that recently produced Talent.com, a cross-industry, cross-functional study of executives at more than 55 firms, at different stages of leveraging the Net, that has been provided to WWD. E-commerce players surveyed included well-established, traditional firms such as Macy’s, Sears, J.C. Penney, Kmart, Lands’ End, Eddie Bauer, L.L. Bean, Barnes & Noble, Office Depot and Time Warner, and dot-coms like eToys, Amazon.com, Lycos, GeoCities and WebMD.
Executives of those companies were interviewed about the impact of the Internet on their corporate cultures, and the skills that contribute to leadership success online, as well as the ways they are using the Net.
“Gracefully dealing with extreme growth, adapting to extraordinary change, instilling a strong customer-focused mentality and creating an environment that encourages innovation” are the most demanding challenges facing cyber-executives, according to those interviewed for Talent.com. Plus, many of those hired for key posts do not bring online experience to the table, yet, as the study noted, still have to be able to “act fast and know how to execute.”
Talent.com added, “Inactivity is a bigger sin than trying new things, making mistakes and learning from them. [In cyberspace] only the flexible and swift survive, and whether or not companies develop cultures that embrace the opportunities of the Internet is fundamental to their success. In the words of one respondent, ‘Culture is everything.”‘
While traditional apparel merchants face these challenges, encountered by any firm staffing a fledgling e-commerce effort, they also must clear some hurdles that are not commonly found on the cyber-course pursued by other service sectors, such as media and finance, or by pure dot-com players. Those issues include market capitalizations that are often one-half or one-third the size of those secured by the dot-coms, as well as concerns about front-end issues, like fashion merchandising, and back-room operations, such as fulfilling merchandise orders and fielding returns that do not affect other service industries.
However, Nadherny said, “Traditional organizations that are willing to structure tracking stocks, or phantom equities, can attract the talent needed [for Net ventures]. A lot of companies are struggling with this now, trying to decide whether to add these instruments, or to spin off their Internet units entirely, so they can compensate talent with the new equity created.”
Tracking stocks are one form of equity that stand to do better, or worse, than the stock of the parent firm, by focusing on revenue derived from the firm’s dot-com enterprise, as well as costs associated with that venture. At the same time, there is no separation of assets reflected by the tracking stock from those of the overall company, thus insuring the dot-com executives the best of both worlds: the grounding of the parent firm’s performance and a chance to shine in cyberspace.
Nadherny noted, though, that people compensated with new forms of equity in startup Net ventures have to be of a “risk-oriented mind-set.” And since they must be willing to live with a fair amount of risk in their pay packages, executives hired for key Net posts, within traditional firms, should be given the autonomy to operate with some independence from top corporate management.
Asked which brick-and-mortar retailers of apparel have done a good job creating the compensation deals and business strategies that can hook top cyber-talent, Nadherny named Gap and Sears.
“Sears has provided Sears.com with a fair amount of autonomy,” he said. “That’s something Internet talent looks for: Will they have freedom, or are they going to be governed? Sears is making a strong effort in that direction.
“Gap is doing a reasonable job in this area; they’re pretty forward-looking,” Nadherny added. “The company’s Internet efforts are said to be fueling Gap stock, along with Old Navy and Banana Republic, which have been a hit off-line.”
But, in Nadherny’s view, Gap and Sears are among the few exceptions in the field of traditional specialty and broad-lines retailers that market apparel. “In many ways, we are still waiting for creativity in the compensation of Internet talent,” he said, referring to those sectors.
Nadherny added, “A lot of apparel retailers have been slow to grow online because they’ve had Internet functions siloed within their existing companies’ structures. They are almost trying to contain them, rather than expand, due to perceived conflicts [with existing businesses.]”
However, the realization is spreading among executives of traditional stores that it behooves them to grab a piece of the action in cyberspace — even if it means mostly shifting sales that might have been transacted elsewhere. “It took them a while to realize that someone in a garage was probably capable of coming online and eating their lunch,” Nadherny said.
Still, Nadherny asserted, “It is hard to think of a non-catalog retailer that has aggressively stepped up, online, without fear of cannibalizing their other channels or alienating vendors.”
Pressed to name any leaders in cyberspace among brick-and-mortar stores selling apparel, Nadherny said, “Macy’s.com is probably the most advanced and J.C. Penney has been a pioneer in taking an integrated approach between its stores and Web site; Penney has been online for about four years.”
More recently, he added, Nordstrom has struck a “leadership stance” with the launch of Nordstromshoes.com.
But Nadherny said many apparel retailers are still grappling with basic questions about filling online positions, including how to locate talent, how to seal a hire and how to piece together attractive pay packages to both lure and retain that talent.
“Everything is moving around traditional companies at warp speed, so they have to find ways to become more nimble,” said David Daniel, a managing director of SpencerStuart’s unit in North America. “Yet there are fears those executives harbor about jumping into cyberspace, where the economics [of a profitable business model] are unknown.
“So far, it has been a big black hole, but one that is filled with red ink,” Daniel added.
As a result, Daniel noted, “A lot of traditional companies, like apparel retailers, are watching and waiting to see what happens, in an attempt to be a smart mover rather than a first mover.”
However, industry observers increasingly have projected that the longer traditional companies wait to kick off e-commerce, the more difficult it will become for them to achieve success, let alone dominance, online. Standing in their way will be the rapidly increasing number of dot-coms and the explosive sales growth of existing pure Net players, which are better positioned to quickly build the customer base and scale necessary to turn a profit in cyberspace.
One significant opportunity for traditional retailers lies in putting Internet kiosks in their stores, extending the availability of goods online to customers who are not otherwise connected to the Web, while making shoppers more comfortable with unfamiliar technology.
The roster of traditional stores using this tactic has been expanding, and currently includes Gap, J.Crew, REI, Kmart, Sephora, Synchrony, DKNY and, most recently, Bloomingdale’s, which on Thanksgiving weekend launched 12 Net kiosks in three of its stores.
“I think the ceo’s of these kinds of companies are starting to read the same studies and survey results that others have,” Nadherny said.
For example, he cited the “1999 Cyber-Shopper Study,” conducted by Navidec Inc., which estimates that 53 percent of Net users will purchase something online this year, up from 26 percent in 1997. That survey also projected cyber-shoppers would spend roughly $206 per capita online in 1999, which would mark an increase of 45 percent over cyber-spending of $142 in 1997.
According to Greenfield Online, approximately 82 percent of Net surfers are putting some merchandise into e-shopping carts, whether or not they ultimately purchase all those items.
In the few years since e-commerce has taken off, two principal business models have emerged in cyberspace: Web-enhanced enterprises and Web-centric companies. Not surprisingly, executives in the two groups possess varying perceptions of what drives their sales and efforts to achieve profitability.
According to the Talent.com study, executives of Web-enhanced firms focus on products and emphasize brand names, competitive pricing and economies of scale. Leaders of Web-centric concerns concentrate on the customer: converting shoppers to purchasers, retaining customers, calming the concerns of cybershoppers — like the privacy of personal data, security of credit cards, ability to make returns — and continually evolving their Web sites.
Web-enhanced firms use the Net primarily to distribute products, services and information. They tend to be large, traditional players, such as Macy’s, Fingerhut, Penney’s, Time Warner and Charles Schwab that are seeking to bolster existing business processes. Their strong suits are brand recognition, ad synergies with traditional businesses, consumer trust, established vendor relationships and the ability to leverage their parent companies’ assets and profitability.
Web-centric companies, like Yahoo, Amazon.com, eBay and America Online, have based their businesses purely on the Internet. Advantages of this framework are the singular focus of senior management, the ability to edit overall assortments according to what sells best online, low fixed-overhead costs, ready access to equity-based compensation packages and the capacity to quickly identify the customer and rapidly make tactical and strategic moves in response.
Asked if he expects either model to emerge a clear winner, Nadherny said, “It’s still pretty wide open, but the farther out we get, the more dot-coms we’ll see and the more competitive the Internet will become.”
“That’s why venture capital funds have been looking more to Web-centric firms,” he added, rather than concentrating on traditional players that are launching Net enterprises.
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How Should Web Executives Prioritize?
Web-Enhanced Executives Should Focus Mainly On:
Building support among those in other parts of the company.
Managing the rapid rate of change online.
Current speed of internal decision-making.
Attracting top Internet talent.
Leveraging brand equity in traditional business world.
Web-Centric Executives Should Focus Mainly On:
Listening and responding to customers in entirely new ways
Enhancing the customer experience
Better leveraging technology and infrastructure
Finding effective merchandising and marketing strategies
Source: SpencerStuart’s Internet Practice