After years of work and a lengthy interview process, you have been offered an Executive position, congratulations! Executive-level compensation is often complex. Even if your employer’s initial compensation seems generous, you should not ignore the fine print. Don’t be fearful of negotiating executive compensation because you might end up missing out significantly. Read on to understand the art of negotiating high-ranking executive positions.
What Factors Should Be Considered When Determining Executive Compensation?
Negotiating terms prior to accepting a position is always a careful dance. You want to ensure you obtain the best possible terms while balancing the relationship with your new employer. Hiring a lawyer to help you through this process ensures your rights are protected in a professional and straightforward way and that any negotiation is done by your lawyer and not between you and your new team.
Expert legal advice and guidance help uncover any issues or things to consider before the deal is done. Before you sign employment, executive compensation, non-solicitation, non-competition, and severance agreements, seek expert legal advice to ensure you are accepting terms that are clear and favourable and that any gaps or loopholes are closed.
Why Executive Compensation Is An Issue
Employment contracts for executives are more complex than regular contracts. Understanding the compensation you are entitled to and the industry standards can help you make an informed negotiation.
If an employer offers you an executive compensation package, you will likely encounter several complexities like tax and other issues. These issues need to be reviewed by a lawyer before you sign the contract. The common issues that arise in executive compensation include:
- Deferred compensation and stock options
- Restricted stock
- Release of legal rights and claims
- Bonuses and bonus structures
- Travel privileges and expense reimbursements
- Retirement benefits, including medical, disability, dental, and life insurance
- Legal and tax fee reimbursement
- Change of control provisions
- For-cause termination & delineated severance benefits
- Restrictive covenants like non-solicitation, non-competition, confidentiality clauses, and trade secrets
Executive Compensation Negotiation Checklist
Executive compensation contracts differ from normal contracts. Several compensation categories are used to ensure that executives receive competitive compensation. What are the four elements of compensation for top executives within organizations? Here’s what you should focus on when negotiating an executive compensation package:
This is the easiest element of executive compensation that requires the least explanation. Who are the key players in setting executive compensation? The compensation trends in the industry or in a company’s geographical area play a main role in determining an executive’s annual salary. Many companies are leaning toward incentive-based compensation, but base salary still remains relevant. Incentive-based compensation ensures that executives act in the company’s best interests and meet their target goals.
Like regular employees, executives also receive benefits. The benefits include health benefits, life insurance, and long-term disability coverage. Other benefits include life insurance, long-term disability coverage, increased holiday days, and increased vacation days.
These are commonly known as non-cash privileges or perks. Executives receive perks in addition to financial compensation. Perquisites can include a wide range of benefits and are tailored to the unique needs of an executive. The common perks include gym memberships, trips abroad with family, cell phones or other technology, education reimbursement plans, club membership, vacations, and others.
Severance & Change-In-Control Agreements
An executive compensation plan can also outline what you are entitled to if your employment is terminated. It also outlines what will happen if there is a change in the control or ownership of the company. According to the Employment Standards Act, an executive is entitled to severance pay in case of termination without cause. However, the severance pay in an executive compensation plan will likely be significantly higher than the amount owed under the Act. For example, instead of receiving a week of pay per year of service, an executive might receive a month of pay per year of service.
Another executive contract example can outline that if an executive is terminated without cause within the first year of employment, the executive receives a severance package. The severance package will include one month of pay per year of service. The service will not just be with the current employer but the year of service to the previous employer as well. With these arrangements, executives will be comfortable leaving their companies and joining new ones without worrying about what will happen if the new deal turns sour.
Executive compensation contracts can also include a golden parachute. The provisions of a golden parachute outline that in the event of a change of control or ownership of a company, the executive will receive certain compensation. The compensation can be in the form of a sum of money, stock option, property, pension proceeds, or annuity or insurance proceeds. In addition to compensating the executive, these measures prevent hostile takeovers of companies by increasing the costs associated with acquiring a company.
These include annual bonuses and incentives incorporated into executive pay. These benefits are awarded at the end of the year. They vary depending on the executive’s performance in their role. The bonuses and incentives can be a fixed amount or a percentage of the executive’s pay. Bonuses can be tiered, whereby an executive receives a target bonus upon performing well and a stretch bonus when the executive performs extraordinarily.
Long-term incentives are mainly awarded to top-level executives whose contribution directly affects the company’s performance. Unlike short-term incentives that mainly promote good performance, long-term incentives encourage loyalty to the company. They include stock option plans, non-qualified stock options, and golden handcuffs. For a golden handcuff, an executive receives a certain sum of money, but only after staying with the company for a predetermined period. The golden handcuffs ensure that executives don’t just stay in their positions for short stints. It ensures that executives work with the company for more than a transient period.
Negotiating Private Equity Compensation
The C-level position negotiation strategies for private equity portfolio company executives differ from those of a public company. For a private equity company, you will be negotiating employment terms driven by performance, time, and achieving liquidity and growth. The driving forces in an executive team’s compensation structure are the exit and liquidity upon exit. Other legal definitions like “good reason,” “cause,” “dispute resolution provisions,” and “restrictions” are similar to any executive contract. These standard terms are mainly negotiated based on market terms.
Other Executive Negotiation Points
In addition to negotiating for executive salary, you should negotiate on the following:
As an executive, you should have ample due diligence on the organization’s performance and expectations before you sign the contract. The company must also give you sufficient time to review your offer. You should review the offer with an experienced lawyer. Only a small percentage of executives consult lawyers when reviewing offers from companies. You should not make this mistake. Hiring a lawyer might look like an additional expense. However, it will pay up in the future. With legal guidance, you are assured that the executive contract will set you up for success.
You must look beyond the bonus potential and give yourself an opportunity for a guaranteed income. Here are some terms that you should understand and negotiate for:
- Double trigger
- Cashless exercise
- Extended exercise
- Milestone payments
When working as an executive, you have a right to market-driven, fully aligned salaries and commissions. An executive has a significant role in the success of the business. Aligned compensation indicates that an executive understands how the business generates income and its role in achieving this objective.
Right to Consult
You can build your wealth through advisory or consulting work. When negotiating executive compensation, you should ensure that it has a right-to-consult clause. Your employer should not restrict you from using your hard-earned expertise to generate income through consulting agreements.
Our Lawyers Can Help
It is crucial to understand the components of an executive compensation contract. It helps you ensure that you receive appropriate compensation and that your interests are safeguarded in the long term. You should always consult an experienced lawyer before signing any contract. A lawyer will help you identify areas you can negotiate in your favour and the problematic clauses that you should be aware of. Your lawyer also helps you to determine the enforceability of the punitive portions of your executive compensation contract. A lawyer can also be helpful if you have been terminated from an executive position. If you need guidance on how to negotiate executive compensation, contact Walter Law Group and discuss your case with experienced lawyers.