Getting to "Yes" on Compensation

To stay competitive in the global marketplace, companies are under enormous pressure to find and retain world-class executives who can motivate people and continually produce strong bottom-line results.

Not surprisingly, top talent tends to gravitate toward well managed companies with clearly defined strategies and competitive products or services. But occasionally, like marriages which seem to be "made in heaven" only to fail at the church door, agreements that should work between excellent companies and qualified candidates founder over compensation issues.

Why candidates reject "perfect" offers

If a candidate is intrigued by the nature and challenge of the work, and the future opportunity it holds, then the most important step toward "Yes!" has been taken and the compensation package can be worked out, provided the company's and the candidate's expectations are reasonable. This may seem obvious, but if the candidate does not like the job, its scope or potential, then the package is irrelevant no matter how generous. Conversely, if the package isn't attractive, the candidate won't take the job.

This is why we as executive recruiters put so much effort into helping the company and the candidate avoid, as Paul Newman put it in Cool Hand Luke, a "failure to communicate." This means advising the company, for instance, on what the market rate is for comparable positions, and making sure the candidate keeps his or her demands within these bounds. The goal is to balance both sides' expectations.

Flexible approaches help

With qualified candidates at a premium and no two employment packages ever exactly alike, getting to "Yes" is made easier when companies tailor their senior-level compensation packages with a maximum of flexibility and creativity

In signing the coveted new VP for Sales and Marketing, for instance, it is understood the company has to stay within its personnel budget as well as the parameters of its business sector to stay cost-effective with the competition. And it must be very sensitive to internal equity: the emotional harmony of the existing management team must be maintained to avoid disrupting performance. For example, if the package isn't designed correctly, bringing on a "star" who seeks a higher-than-normal salary could lead to an uprising and budget-busting demands from other "stars" already on the payroll.

In this case, the flexible solution could be a confidential signing bonus (as distinct from a "make whole" payment to cover lost bonuses, non-vested "in-the-money" stock options or any other extra expenses), which would satisfy the candidate's desire for more money, preserve management team equanimity and count as a one-time expense rather than a continuing cost. Signing bonuses also have a very persuasive psychological effect: rather than fixating on specific salary figures, candidates tend to focus on how much the company wants them.

If not a signing bonus, then additional bonus incentives tied to achieving high-value objectives are available to bridge the salary gap.

More persuasive than money

For world-class managers in today's "24/7" business environment, time literally is at a premium. So packages that permit them to work certain days off-site, tele-commute or otherwise extend their effectiveness electronically could prove more persuasive than money in attracting and motivating them over the long haul.

Long-term equity incentives

But for abiding incentive, there is nothing like the promise of equity to secure and spur bright, new management stars. Since the go-go 1990s, stock options have been the incentive-of-choice for hard-charging executives. However, according to the Wall Street Journal, faced with mounting shareholder pressure and expected changes in accounting rules, many companies are seriously re-evaluating or even sharply reducing their stock-option award programs.

While stock options may have lost their luster for the time being, grants of restricted stock are available to public companies to attract and retain key executives who want equity in return for measured, long-term performance. Private companies can use phantom stock or cash payments linked to multi-year growth in EBITDA or company net worth net of dividend payments and new equity investments.

For options or restricted stock, a great variety of alternatives exist to help seal the deal (provided, of course, the company plan permits such flexibility). For example, a candidate could be given a block of options or restricted stock at signing, plus the carrot of additional blocks in future years.

These could then vest in "waterfall" fashion (a certain portion secured each year, such as 25 percent per year for four years) or "cliff" style (everything realized at the end of a set period, such as three or five years). Or the two could be combined; we know of one company, for instance, at which candidates are vested with 25 percent of the stock immediately upon signing, then, at the start of the thirteenth month, begin earning the remaining 75 percent in 36 equal monthly increments.

Basically, when it comes to compensation, we subscribe to the old adage that "where there is a will, there is a way" because we have seen that when companies and candidates listen closely to each other's expectations and maintain flexibility in their negotiations, they soon get to "Yes."

Until next time...

Kincannon & Reed
March 2005