As a result of consolidations, management buy-outs, recapitalizations, bankruptcies, and reductions in workforce, more executives are finding their way into the job market, or are in a position to negotiate employment terms with the new owners of their current company. When negotiating employment arrangements, executives must understand the existing market conditions. Executives should be aware of the company’s budgetary constraints in negotiating employment terms, but also the "market" as it relates to compensation packages available to similarly situated executives in the industry, including salaries, bonuses, incentive equity programs, retention bonuses, and severance packages. If the executive is not properly advised, s/he may not receive an appropriate compensation package or may be disadvantaged after the company is later sold or upon an employment termination.
Negotiating employment arrangements for high level executives is more of an art than a science, and it is important to know when to push a point and when to back off. Remember, if successful, the executive will be working with the people on the other side of the table once employment commences. Executives should research the market and understand what compensation is appropriate for the given position, experience level, and industry. In addition, the executive should thoroughly understand what s/he considers the "bottom line" compensation package that is acceptable to move to a new company or continue with the existing company. The critical element in any negotiation is to know your negotiating strengths, and to leverage them without crossing the line and becoming greedy or unreasonable from the company’s perspective. With this information, the executive will maintain the optimal position for negotiating the best available compensation package.
Specific company research is a vital component for understanding the credit risks of working for the company. If the company is experiencing significant financial trouble, or is currently restructuring through a bankruptcy proceeding, then the executive will want to negotiate for higher cash compensation, a retention bonus (generally, 6 months to 1 year), and severance payment in the event of employment termination (typically, 6 months to 2 years and 6 to 12 additional months if the termination is triggered by sale of the company). The executive must enter these situations with his or her eyes wide open to offset any inherent termination risk that may exist.
Management buy-out transactions and company sale transactions where the new owner wants to retain management are more prevalent now with industry consolidation and abundant private equity fund money looking for a home. Executives must understand the alternatives available to share in future increases in company value through equity participation. Equity participation can take the form of stock options, restricted stock, phantom stock units, deferred compensation, et cetera. Generally, these incentive compensation arrangements are tied to future performance or to period of service with the company. Again, there are some market guidelines that control the negotiation of these arrangements. For example, the management group can usually expect 10-15% of the company to be set aside for incentive equity programs, which are normally designated for top level executives. Vesting schedules attach to the incentive equity, which requires the company to meet certain performance targets or for the executive to maintain employment for a certain number of years (e.g. three to five years). Often the equity vesting is accelerated if the company is sold. More sophisticated techniques are available to minimize the executive’s tax implications if there is a continuing investment in the new company going forward. If executives have equity or other vested benefits in the company at the time that it is sold, it is possible to arrange a tax-deferred "roll-over" of the equity through properly structured arrangements involving deferred compensation trusts or deferred stock units coupled with special tax elections. In this way, the executive can share in the increase in value of the company that s/he is helping to build on a tax-advantaged basis.
The last critical element of negotiating an employment agreement is what happens upon employment termination. The executive should negotiate a severance arrangement up front when the most negotiating strength exists and both parties are anticipating a long relationship. Too many executives discover the importance of an appropriate severance only when they are walked out of the company on Friday afternoon being asked to sign a full company release in exchange for a nominal severance payment. In addition, many companies are requiring executives to sign non-competition and non-solicitation restrictions in an employment contract or a separate agreement. Often these arrangements are tied to the executive’s equity compensation benefits, which may be forfeited or reduced if the restrictions are violated. The length and geographic scope of a non-competition agreement is dependent on the particular facts and circumstances surrounding the company and the industry. If reasonable, most states will enforce the restrictions contained in such agreements. It is appropriate for the executive to negotiate for severance payments to equal the period of time that the non-competition agreement is in effect since the company is preventing the executive from working in the industry for that period. It may also be possible to negotiate an exception from the non-compete in the event that the executive is terminated without cause.
An executive’s best tool in negotiating an employment package is knowledge and proper counsel as to the market terms that are available. Balancing them to determine an appropriate compensation arrangement is imperative.
copyright of Right Management Consultants,www.right.com
About the Author
Tom Spillane, partner at the Detroit office of Foley & Lardner LLP, a nationally recognized law firm with 17 offices and nearly 1000 attorneys. Mr. Spillane specializes in executive compensation counseling, management buy-outs, mergers and acquisitions, and corporate financing transactions.
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