Congratulations — you’ve got an offer for an executive level role! Whether it’s your first foray into upper management or you’ve been a C-suite stalwart for years, negotiating a compensation package can be nerve-wracking. And while the mechanics of the negotiation might be similar whether you’re an entry-level worker or a C-level executive, there are specific components of executive compensation that could throw you for a loop if you’re not careful, says Howard Seidel, senior partner, Essex Partners.
“In a lot of cases, executives can have a lot more leverage when negotiating an offer, and they also can have a lot more options to consider when putting together the terms of their compensation package. What I always tell my clients is that they have to have a strategy in place to decide what their priorities are when entering into negotiations,” says Seidel.
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What’s your leverage?
Successful negotiation also involves recognizing how much leverage you have based on your current status. If you’re already employed and your potential new company’s trying to lure you away, you have much more negotiating power than an executive who’s in transition or someone who’s been unemployed for a stretch, Seidel says.
You should always make sure you understand completely all the different components that make up an offer before you even get to assessing a value judgment on it — whether it’s good, great or otherwise, Seidel says.
“What are all the different pieces that make up the puzzle? Base salary, bonus and bonus structure, equity, not to mention healthcare, 401K package; if you’re moving from a large, stable company to a smaller startup, packages are going to look very different, because there’s much more risk involved and possibly there are capital differences between the two. I try to help my clients understand how to gauge the value of the entire package,” he says.
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This is a basic element of any compensation package, but it can vary widely depending on a lot of market factors and industry factors, Seidel says. Is the company an established enterprise? A hot new startup? Somewhere in the middle? Are they just about to have a big IPO? These are all data points you should know about when looking at base salary, Seidel says.
“Most importantly is to know your own market value based on your skills, accomplishments and achievements, and be able to show that to the company. You’re already well on your way there, since you got an offer, so this is where that leverage piece comes in. But remember that there have to be trade-offs; if you’re going to a hot startup, you might get more equity and a lower base salary, for instance,” he says.
Bonus and bonus structure
Here, you should be asking not just about how bonuses are structured and on which metrics they are based, but on historical data, if that’s available, says Seidel. You don’t want to get into a situation where you’re promised a certain percentage payout but the company never achieves those targets, he says.
“Bonuses are usually ‘target’ bonuses and are usually a percentage of the base salary. OK, but is that based on how a company typically performs? Is that a ‘stretch’ goal that they haven’t ever met? Is it possible, but not probably? Is it a cap? You also should find out how reliably bonuses have been paid out in the past,” he says.
Other questions include asking who is eligible to receive the bonuses — only certain members of the executive pool? Is it a team bonus, individual performance bonus, a company-wide bonus? Seidel says.
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This can be one of the most lucrative pieces of an executive compensation package, but it’s also the most complex, with a lot of different variables involved, says Seidel. It can also be a major risk. Most companies that offer equity as a part of compensation will pair that with a lower starting salary, and as an executive, you’re taking on a lot of risk, Seidel says.
“Everyone knows what equity’s worth when the company doesn’t succeed — zero. But what’s it going to be worth if the company succeeds? To justify taking on the lower salary, you either have to be more motivated by different things, or believe that the payout will be worth that risk,” Seidel says.
Most start-ups offer equity in the form of shares you’re eligible to purchase at a discounted rate, or that are given to you; you might also have the option to purchase stocks within a certain period, or, at a public company, you might get Restricted Stock Units, says Tracy Cashman, senior vice president and Partner, WinterWyman Executive Search.
“I had a client recently and we negotiated an extended time period for that person to exercise their purchase options — they wanted more than the 90 days originally suggested in the offer. And I’ve also helped clients negotiate accelerated vesting, too — even if you get stock, say the company goes public a few months after you start and you haven’t vested enough. That’s not going to make you very happy about taking the role,” she says.
That payoff can change, too, depending on what role you’re taking on within the company, especially at a start-up, says Cashman. A COO, for example, might be offered a different amount of equity than would a CFO, because of their different roles within the company and their varying levels of impact on the company’s success, she says.
“So many different considerations come into play when equity’s involved: is the company a start-up? What stage? Are they about to commercialize? Go public? If they’re receiving venture capital, are they about to get a huge influx, which will then dilute your equity? What’s the effect on my equity if the company does well, but not great? In the event there is a payout, who gets paid first? Who gets the bigger chunk?” Seidel says.
If equity will play a role in your compensation, take your time to ensure you understand as much as you can about your stake in the company’s success. It can help to look at financial reports and projections to figure out an approximate value for that equity, and you also should ask the company to help you figure that out, he says.
Change of control agreements
Change of control agreements, severance packages, golden parachute — whatever you want to call it — are agreements that cover what happens if the company doesn’t succeed, or if you leave the company, voluntarily or not, Cashman says.
“These govern what happens in the event the company goes under, or if you leave voluntarily or if your employment’s terminated for whatever reason. They should cover a specific period of time afterwards when you’ll receive compensation, and make sure you are aware of any non-compete limitations that may be written into them, too, since those can impact your employment going forward,” Cashman says.
Oftentimes, candidates will quickly be able to tell a “good” offer from one that’s not so good, or that isn’t in line with their expectations. But even when an offer’s not great, don’t get defensive, Seidel says. Always assume the offer was put together thoughtfully and in good faith, based on what the company can comfortably offer. It most likely won’t be the best they can do, but that’s what a negotiation is all about, he says.
“Look at the offer from a fairly objective standpoint. What’s good, what’s bad, what’s missing, what’s there that you didn’t expect and what things you’re willing to compromise on to make the offer what you want,” Seidel says.
And it can be helpful to have a compensation expert or a legal representation person to help you navigate this, he says, even though that requires some financial outlay up-front.
“There are thousands of thousands of dollars at stake when you’re at the executive compensation level; wording matters, decimal points matter, the kind of equity that is being done matters, there are huge tax implications, too, that you might not have thought about. When it comes down to it, spending a few thousand dollars up front to go over your employment agreement and making sure all the t’s are crossed and the I’s are dotted is a great investment,” Seidel says.
Above all, make sure you’re being respectful, flexible and open throughout the process. Many people, especially at the executive level, believe playing hardball is the only way to make sure these negotiations are handled in their favor, but Seidel says this tactic backfires more often than not.
“Be respectful of the process, be respectful of the offer. Obviously you like the company, you like the role, you like the opportunity — you want to make this work so it’s mutually beneficial. This is not a transactional situation, where you’re going to get the best deal, walk away and never see these folks again. This should be a long-term, ongoing relationship, so you have to start it on the right foot,” Seidel says.