Negotiating The Right Executive Compensation Package For Yourself
By Robert A. Adelson. This article was originally published in CEOWorld Magazine on October 30,2018.
When you negotiate your executive compensation package, you should seek to accomplish several important and distinct goals:
- Secure your own basic financial needs,
- Secure a highly valuable equity stake for yourself in the company,
- Negotiate the key terms for equity or phantom stock,
- Create incentives that align with the company for growth.
At the same time, you want these goals and means of achieving them to strengthen your position at the company. These negotiations can serve to demonstrate to your new employer your abilities as a skilled executive capable of managing complex situations that affect himself or herself directly.
Securing your basic financial needs
This requires a balance of your personal and family’s financial needs with the position and capability of your prospective or new employer to meet those needs. Basic financial needs of you and your family would include your base salary and key benefits your family depends on, medical and dental insurance, disability insurance and perhaps some form of pension benefits. From the employer’s viewpoint, there is first the issue of affordability which depends on the company’s financial position, and then the issue of fitting the executive and his or her financial needs into the compensation structure of the company. Part of these negotiations can involve allowing special executive benefits. It can also involve allowing a minimum bonus to reconcile the executive’s minimum base salary need with keeping the stated base salary structure of the company.
Having an equity or equity-equivalent stake in the company
In today’s world of executive compensation, most CEOs and senior executives are not content to be paid a salary and bonus, but rather they expect an equity or equity-equivalent component as part of their executive compensation package. Often, this equity component can prove to be the most valuable part of the package. That is so for two reasons. First, it is the equity component that offers the possibility of exponential growth. If the company’s value rises 2x, 3x or more, the value of your equity can potentially exceed by many times the aggregate value of your base salary and bonus. Second, it is the equity component of your package that offers the potential for long term capital gains treatment. Such gains are often taxed at one half the marginal rate of ordinary income, and might also potentially escape the further tax bite of payroll taxes.
Negotiating key terms of your equity
Thus, if you secure the right equity position and structure in your compensation package, this can dramatically increase the potential value of your package, and the amount you can take home after taxes. There are a number of choices for equity structure among ISOs, non-qualified options, RSUs, restricted stock, and performance shares. Each of these also involve important terms on vesting, acceleration, valuation, exercise, claw backs, drag along, tag along, parachute provisions and other key terms.
Here is just one example among many. With ISOs and most options, the contract provides you must exercise within 90 days of employment termination. Yet, non-quals have no such requirement and plans allow discretion. Thus, you want to negotiate that discretion to give you 3-5 years to exercise in case the options are underwater at the time of termination. For CEOs and senior executives in family businesses, all these same equity opportunities can be replicated by the creative use of phantom stock.
Securing incentives for a “win-win”
As part of the executive compensation negotiations over equity, you aim to enlist the company owner to the view that creating a meaningful equity stake for you will further align you to the interest of the company owner. Executive equity aligns interests and creates a “win-win” in three ways. First, the executive, like the owner, directly benefits from a rising stock price and rising valuation of the company. Second, vesting is often tied to company loyalty which benefits company stability. Third, vesting is often tied to achievement of milestones and levels of growth. These same incentives are also likely included in your executive bonus arrangements.
Incentives should be reasonable, achievable and set with input from the executive. Annual incentives should be set at the beginning of the year so targets are clear. They should also be based on level of achievement to avoid the unfairness of cliff targets. Properly set up, equity, performance and bonus incentives can create just the strong alignment of executive and company goals that all should seek in an executive compensation package.
Demonstrating your skills in negotiation
If you are incapable or uninterested in striking a good deal here, where your self-interest is maximal, why should people believe you will perform well elsewhere? The details of your compensation package can vary hugely and there are many possibilities. If you are a hardball negotiator that drives a tough bargain, pushes the company to the wall, and engenders bad feelings such that an impasse arises, that is not a good sign for future success. If, on the other hand, you bargain hard, but fully justify your positions, listen and respond to the company’s positions and strike compromises where needed so each side can achieve a level of satisfaction, well then, that’s probably why they choose you in the first place, and they will expect you to continue along those lines when it benefits the company.
The key is to demonstrate your understanding of the substance, that you are no pushover but know how to reach a deal and preserve the respect of the other side. If you are taking a chance on a new venture, including earning less than you could make elsewhere because it’s a company you believe in or you want a new challenge, make sure that they know that. This turns a potential negative into a positive, as they now understand the reasoning behind your decision, and your willingness to make concessions to join the team. Often, the stake you placed in the ground in these negotiations may be revisited in the future, after you have proven yourself and seek adjustments in re-negotiation and future negotiations over your executive compensation package.
Other key areas of your executive job offer
Negotiation of your executive compensation package is an important part of your executive job offer or employment contract for a new CEO or senior executive position. However, in your executive employment agreement negotiations, there are other key areas for your negotiations as well, including the following:
- Your position and board seat if you are the CEO
- Your title, duties and responsibilities if you are not the CEO
- Commitments of the company to things you relied on taking the job
- Your signing bonus, including making you whole for things left behind
- Minimum level of medical insurance, disability insurance, pension and other benefits
- Relocation, if relevant, and other key expenses the company needs
- Triggers for termination and severance, including triggers you control
- Components of your executive severance package, including equity, bonus and benefits
- Reasonable terms for non-compete, non-solicitation and other restrictive covenants
Using counsel to help you achieve your goals
In each of the instances just cited, as well as negotiating your executive compensation package, it is wise not to do this alone. Using the services of an experienced executive compensation lawyer offers you the benefit of valuable advice and a sounding board for terms and strategy. Experienced executive employment counsel also offers you potential validation for your position and a buffer to insulate you from hard feelings in negotiations.