Using The Terms Of Employment To Recruit Top Talent To Your Company
By Robert A. Adelson
If you are the company, trying to recruit top talent or skills, and your prized hire wants more than you can offer, you need to know the a way out of the box. It is important to know how to use the employment contract as a recruitment tool and still not give away the store.
For the executive, the best time to negotiate employment terms, including compensation, relocation, tax gross-ups, stock and options is before an offer is made or accepted. By seeking fair treatment for both sides shown below, the company can gain a critical edge in executive recruitment and retention.
Executives often resist a switching jobs because of vesting options, bonus, and other “golden handcuff” benefits. Thus, your signing bonus may be the golden key to open the door to hiring. This bonus also cements the bond between recruit and company and compensates for known or unforeseeable risks that may arise. What a company pays up front can vary, depending on need and perceived immediate value the executive brings. Bonuses often include options, below-market stock, a retirement annuity, other cash and non-cash considerations or combinations.
Stock and options should be structured to reward loyalty, individual achievements and company success. The company can enhance its offer with a package of rights that deliver a real non-illusory equity stake. These include anti-dilution, registration cash-out, change of control and post-termination protections.
To leverage future payout, the company should structure equity taxed as low as possible and boost executive take-home pay. Here, the rule of thumb is: options are the best for high-value equity; stock is best for low-value equity. Tax advice needs to assure the right mix of equity, including stock, ISOs, non-quals, SARs, or Phantom Stock arrangements. Each must be carefully structured to avoid ruinous “tax surprises” down the road.
Position and Responsibility
The executive needs to assure his authority and sufficient visibility, to keep known in industry. It is also in the interest of both parties to confirm officer and/or board positions, expected responsibilities, known performance targets, organizational authority and reporting structures, and level of support.
Non-competes and NDAs.
Companies must protect existing and future trade secrets through non-disclosure agreements (NDA), but the NDAs should not reach to prior knowledge and publications and information generally known in the field. “Non-compete” agreements should be separately calibrated for three concerns: the executive taking a position with a competing firm; soliciting customers, prospects, grants or partners; or raiding employees after having moved on to a new position in another company. The period should be measured by expected shelf-life of confidential information and time needed for the Company to re-establish itself and integrate a successor executive into the prior relationships involved.
Companies should provide a fixed term contract and mutual early termination clauses, with and without cause. This too shows commitment. Yet, each side enters the relationship knowing the rules on what happens if change occurs in the future. With-cause termination clauses should be based on matters under the offending party’s control. Without-cause termination should require each party to provide a notice and concede with-cause contract rights.
Severance protects the executive against the company’s normal right to terminate without cause. However, severance also helps the company recruiting the reluctant executive and in providing a cash deterrent against the executive violating non-compete clauses on termination. Severance terms vary and are often phased on period of service with the corporation.
Compatibility of executive and company, fit of skills and personality, as well intelligence information on the company’s current business status and potential, are key to the success of the executive/company partnership. Each side’s conduct in negotiating your terms of employment can offer you valuable insight into the party’s decision-making process, motivations and flexibility, as well as your potential fit. Never fear the word “no” in negotiations. Avoid a job or a hire if your negotiations reveal traits that warn of a bad fit. A good contract does not make a good job or a good hire. There is still no substitute for doing your homework. But, by thoughtfully negotiating these areas, both parties learn insights into the other and can lay a foundation conducive to getting the most from the relationship.
Robert A. Adelson is a business, tax and employment attorney and partner at Engel & Schultz LLP, Boston, Massachusetts. © 2010 Robert A. Adelson