Risk Management

Why One CFO Said Good-bye to His Defined-Benefit Pension

`Dot-corps' give senior financial execs a chance to test E-commerce waters with less risk of drowning.
David KatzApril 12, 2001

Sometimes it pays for a CFO to take a chance on a new job. But in this economy, maybe not too much of one.

Ken Possenriede, CFO of Exostar, an independent E-marketplace for the aerospace and defense industry, finds he’s made just such a move.

Before being named CFO of Exostar, one of the emerging “dot-corps,” early this year, Possenriede was finance director of the systems- integration staff for Lockheed Martin in the United States and before that, CFO for Lockheed Martin United Kingdom.

Exostar is owned by Lockheed Martin, BAE Systems, Boeing, and Raytheon. The blue-chip pedigree of the B2B exchange’s founders apparently helped convince Possenriede to leave behind the defined-benefit pension plan he had at Lockheed and accept a 401(k) package instead.

He acknowledges that the pay at Exostar is “slightly more robust, because of the risk” than it was at Lockheed Martin. But Possenriede, 41, tells CFO.com he felt it was the right time for him to “get out of a large company” and into one in which “we’re inventing things as we go.”

The CFO says the situation reminds him of his days at Lockheed Martin U.K., which he refers to as “a small company on an island.”

At Exostar, “it’s been very rewarding,” he says. “I’m making decisions I could not make in a brick-and-mortar.” Earlier this week, in 15 minutes, the management team made a decision about the transaction prices Exostar will charge.

“In a typical large corporation, we’d have a rigorous review” and a long delay, he says.

That sounds like the pleasures of working at dot-com. But the difference is that a dot-corp like Exostar carries much less risk of job loss. That carries implications for how a CFO like Possenriede directs the organization’s compensation and benefits policies as well as for his own package.

What, exactly, is a dot corp?

It’s stand-alone unit or subsidiary or a business division of a parent company, a partnership, or joint venture “that provides New Economy products or services; brings hard assets, relationships, and reputation to the table; may use the Internet as a principal supply chain medium; and typically has an on-going revenue stream(s),” says a recent survey of the compensation of E-commerce professionals done by Unifi Network, a PricewaterhouseCoopers subsidiary.

The italic type is added because that revenue stream is the key difference between a dot-corp and a dot-com. The latter, says the study, has only “begun or is in the process of developing a sustainable revenue stream.”

Security Versus Insecurity

Because dot-corps have a consistent revenue stream, yet exist in the relative risk of the New Economy, they live squarely between the realms of brick-and-mortar firms and dot-coms. That location says everything about the way dot-corps are handling their benefits and retention issues.

In short, dot-corps are looking for a different type of executive than are traditional companies or dot coms. On the one hand, dot-corps try to lure employees who have a track record of staying put.

Says Possenriede: “We’re not looking for someone with $100 dollar stock options [for which the stock is now] worth 53 cents and [who’s now] looking for the soup du jour.”

Further, he says, Exostar isn’t interested in executives who will make decisions on their own without considering the ramifications for the rest of the organization.

A dot-corp, in short, is a place where “you still have processes, but move at lightning speed,” he says.

Peter Gundy, a partner with Unifi Network, a human resources consulting unit of PWC, says dot-corps must strike a balance between riskier, equity-based compensation and enough security to lure executives away from the Old Economy.

Thus while dot-corps may offer “a significant equity component,” it may be in the form of restricted stock rather than options so as to expose employees to less downside risk, he says. Signing awards and guarantees on bonuses may also be part of the package.

While employee benefit outlays by dot-corps tend to be “significantly less” than what their parent companies shell out, “dot-corp benefits tend to be much more flexible,” says Gundy.

Dot-corp benefit plans, for instance, might offer much more employee choice, as well as “off-the-wall options” like pet insurance.

Currently, there’s a “raging debate” afoot at parent companies about what percent of the dot-corp should be offered to management in the form of equity, Gundy says.

The consultant thinks that, often, “the mistake is giving away too much too soon.” Parent-company executives and board members “really have to weigh how much value can be delivered by the strategy, and try to back into the equity” from there, Gundy adds.

Since dot-corps tend to have bigger, more reliable backing to start with than dot-coms do, dot-com executives may merit more equity. “If you’re starting from zero, you have to grant more to [executives to] deliver,” he explains.

Possenriede says that assessment applies to Exostar, pointing out that there’s a “risk-and-reward” tradeoff between what it’s like working for dot-corps and dot-coms.

“We’ve been established by four significant players in the aerospace and defense industry,” he notes. “Our maturity from a company and a culture standpoint should be there.”

While the company is considering stock options and compensation incentives, because it has less risk than a dot-com, it tries to compete more for employees by offering high salaries, the CFO says.

For now, he finds the risk-reward balance just right. While Exostar’s backing is solid, the backers are “not my grandparents,” Possenriede quips.

Unlike his situation at Lockheed, which would transfer him to another project if it decided to shut down a project he was working on, if Exostar went out of business he’d be out of a job.

The way the market’s going, however, the combination of risk and reward that dot-corps offer might be just the right fit for many executives.

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