Charles Allen may be the most unlikely individual ever to be the second best-compensated corporate executive in Virginia. Only 33 years old, Allen attended both Princeton and Yale, but never graduated because he didn’t complete language requirements. The Georgia native then bopped about the world in a series of disjointed jobs. He was a reporter for a Japanese newspaper on the West Coast and then worked as a corporate consultant in Europe and Australia. "I’d flung myself around the planet for 15 years," he says.

His wanderlust drawing to a close, Allen landed in Virginia. He and a young friend from Australia scraped together some money in 1996 from angel investors and formed webMethods Inc., a provider of electronic business solutions and consulting. The Fairfax-based firm hit the Net craze at just the right time. webMethods soon became one of the largest B2B integrators in the country, building a client list that includes such powerhouses as Citibank, Dell, Teligent and Motorola. Stock hit a high point of $336 per share even as Allen was making a relatively modest salary of $158,012 a year as a vice president. But he hit it rich — really rich — by cashing in thousands of stock options this year, earning an incredible $85.9 million. That snared him the No. 2 slot on Virginia Business’ annual list of the best-compensated executives.

Why is this man smiling? Charles Allen, co-founder of webMethods

Allen’s story shows just how much and how quickly executive compensation is changing in Virginia. Long gone is the man in the gray flannel suit plodding along in a rigid corporate culture year after year in hopes of the big corner office and salary to match. Salary? Phooey. What matters now are stock options and other perks that reward innovation grandly and at a pace light years faster than before.

In four short years, for example, young Allen did more than outpace traditional big earners twice his age, such John W. Snow, chairman, president and chief executive of rail giant CSX Corp. He even surpassed such high-tech gurus as Robert W. Pittman, president of America Online. Indeed, Virginia Business’ compensation survey shows that the only Virginia-based executive who made more than Allen was AOL’s legendary Stephen M. Case, and even he took a hit this year. Case’s total earnings registered at only $117 million, compared with $159.2 million the year before.

But there’s more to the fast-changing compensation picture than the now-familiar stock options story. With the Nasdaq crash this spring, the bloom is off options, which can become worthless almost as instantly as they can turn to gold. As Allen admits, with the volatility of the stock market in high tech, "my status could change by tens of millions of dollars a day."

Because stock options alone won’t cut it anymore, companies have to drum up new ways of grabbing and keeping top managerial talent. Unemployment remains low and high-tech firms are still sprouting up. There just aren’t enough managers to go around. "It’s a question of supply and demand," says Paul Dinte, president of Dinte Resources, a McLean-based executive search firm. "More high-tech companies are being born than they have managers for. They need the right managers; they need leadership."

So what to do? Besides the usual options route, more companies are adding an array of incentives to grab and keep top managers. These include small perks, from sports cars to guaranteed sabbaticals, to keep managers fresh and intellectually sharp. Some firms offer deferred bonuses so execs can count on goodies for years, or they structure stock options in such a way that their value doesn’t have to be wiped out if the market tanks.

Moving beyond monetary enticements, some companies are playing to the philosophical inclinations of their brightest executives. Cutting-edge firms are creating corporate cultures so simultaneously attractive and challenging that the best talent just has to be part of it. "Usually, your production staff is challenged by the nature of the work," says Stephen L. Alexander, CEO of Herndon-based Digital Focus. The company installs software systems for firms around the globe. "Your best managers are challenged by what the company is going to become."

While there is plenty that companies can do to keep high-performing professionals and middle managers (see story, Page 25), top managers must be handled differently. "It is a different equation," says Alexander. "Executives are a lot more seasoned. ... They’ve done this two or three times before." Salary alone isn’t always the big draw for good talent. "One guy I knew made huge numbers but was bored with his job, so he made a change. You see a lot of that in top management," Alexander says.

There are distinct limits to what salaries can realistically be paid. One reason is taxes: The Internal Revenue Service started penalizing companies that award more than $1 million in salaries. "The law was enacted in 1994 and since then, there’s been a tremendous slowdown in salary raises," says Carol Bowie, director of publications for Executive Compensation Advisory Services, a research group in Alexandria. Indeed, a look at Virginia Business’ compensation chart shows that only about one-third of the 100 executives on the list make more than $1 million in straight pay. The rest is based on performance, such as cashing in stock options or winning bonuses.

Not everyone believes, however, that paying executives more and more each year is a healthy thing. The AFL-CIO, for instance, notes that the average CEO made $12.4 million in 1999, up 17 percent from the previous year. That is 475 times more than the average blue-collar worker, says the union. With growing globalization, the union argues, U.S. workers are being forced to become more productive — up to 30 percent more productive. Yet real wages for average workers are down 9 percent while executives rake in more and more.

Another unsettling trend, says Bowie of the Executive Compensation Advisory Services, is the size of severance packages given to executives who fail. For example, Jill Barad, whose policies helped drive down Mattel’s financial performance, left with a package worth $50 million. Doug Ivester picked up $25.5 million when he left Coca-Cola. Durk Jager got $9.5 million to depart Procter & Gamble after his energetic reform efforts there ended up cutting the company’s market capitalization in half.

Some experts see the big severance deals as another part of the trend toward megabucks for executives. "More and more, executives work in severance packages as a kind of prenuptial agreement," says headhunter Paul Dinte. "They want to have an ‘out’ clause. We do see a lot of people changing jobs. Chief financial officers today last only two or three years before moving on. They just get picked up by another company. It’s just frantic out there."

For his part, Allen is taking his $85.9 million windfall in stride, even if it means he made nearly as much this year as corporate America’s executive superstar Jack Welch of General Electric did in 1999 — $92.6 million. "Does this mean a big lifestyle change for me?" Allen says. "Not at all. We have a culture of not attracting too much attention to ourselves." Yet Allen admits, "It means I’m able to buy a bit more house." A bachelor, he recently bought an abode on Washington’s exclusive Massachusetts Avenue.

Even so, money isn’t what it’s all about, he says. "If you want a high caliber of folks working with you, you have to keep up the challenge of growth. Growth is what motivates these people, not money." In Allen’s case, the money seems to come as an afterthought.