Are You About to Negotiate Executive Compensation? Follow These Tips
written by: N Nayab•edited by: Jean Scheid•updated: 5/19/2011
The increased competitive pressures and traditionally high executive compensation levels place executive compensation in the spotlight, with both companies and executives under increasing pressure to justify their compensation packages.
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Competitive pressures have forced most organizations to take a quantitative approach to their hiring decisions. HR managers looking at how to negotiate executive compensation now go by the value the new person can provide to the company as the guiding force, and negotiate compensation on such a basis.
The best approach for executive compensation negotiation requires incorporating figures. Instead of simply recording past activities or achievements in the resume, quantify such achievements. For instance, instead of merely stating “oversaw business process re-engineering to reduce process time by five minutes" include details such as “reducing process time by five minutes results in productivity increase by 20 percent, leading to overall savings of $20,000 for the unit."
Assess the expected value the company gains by making the hire, based on record of accomplishment in previous positions, job profile, company’s business plan, and size of operations. For instance, point out the expected ROI of the hire against budget, revenue growth, stock value and other parameters derived from the financial statements. Negotiate a salary as a percentage of the expected value added.
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The prevalent knowledge centric business environment raises the stature of human resources as a critical source of competitive advantage. Companies compete for talent, and would readily match if not exceed, the compensation and benefits provided by competitors to retain talent.
Benchmark on skill-sets rather than the position. The demands of flexibility have pushed the traditional concept of pay scale out of executive compensation plans, and compensation now depends more on the skills of the individual rather than the title of the position. Try to determine the worth of specific skills in the industry, assess the skills possessed, and conjure up the industry values for such skills possessed. Professional organizations and websites such as Salary.com or the Bureau of Labor Statistics, or mentors in the industry constitute good sources for such information.
Successful negotiation depends on understanding the demand for the skill-sets, the scope of the job or the nature of duties, and negotiating based on the extent to which the candidate’s skills and competencies will “fit" the requirements.
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Executive compensation includes salary, bonus, and benefits such as stock options, free accommodation, transportation, reimbursement of children’s education, extra insurance, extra vacation, memberships, financial and legal counseling, golden parachutes or lump sum payments in the event of a layoff, and others. Negotiating executive compensation requires considering the range of such benefits offered. Consider the extent and range of benefits offered, and the long term value of such benefits.
At times, the nature of negotiation changes from the overall compensation figure to the type of benefit. Select the most useful and most relevant benefit. For instance, an employee with college going children would find benefits such as company reimbursement of education expense and free company transportation, allowing him to stay near the children’s college most valuable.
Consider the tax implications of the benefits. For instance, opting for 401(k) plan would save income tax, as would stock options. Such tax savings can serve as effective means to reduce cost-to-company without employees losing out in a big way.
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Understand Trends and Preferences
People looking at how to negotiate executive compensation would do well to understand underlying critical issues such as the company’s compensation framework and structure, and the prevalent market and economic trends. Understanding such trends and positioning for what the company can commit to easily makes for a good negotiation tactic.
For instance, if the company traditionally has a cash-heavy compensation structure, negotiating for greater perks may not cut much ice.
Increased labor turnover and tight economic conditions leads to tighter controls for granting perks such as company cars, club memberships, executive health plans, and some other benefits with long-term commitments and implications. Insisting on such benefits may become counter-productive.
Some companies may encourage executives to co-invest in the firm’s existing portfolio of companies, to tie the success of the company and the executive’s performance. Agreeing to the same might create a favorable impression.
Again, regulations such rules established by the SEC and Financial Accounting Standards Board (FASB) may also impact executive compensation. For instance, the FASB rule FAS123R makes it mandatory for companies to record as expenses the value of stock options granted to employees as compensation. This makes employers prefer giving deferred stock or restricted stock grants that vest after a certain period.
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Finally, the success of executive salary negotiation depends on adherence to some time tested tips:
Prioritize demands. Focus on deal-breakers and leave minor issues to the end.
Adopt a win-win approach. Posturing for a win-lose approach creates doubts about the candidate from the word go, or at least may lead to unrealistic expectations.
Other factors influencing executive salary negotiation include a fancy job title, accelerated salary review periods, flextime options, paid sabbaticals, growth opportunities, nature of reporting relationships, and more. The extent to which candidate values such facilities or options may have a bearing on the overall compensation figure.
Merit alone does not ensure a handsome compensation package. As the adage goes, “you get what you negotiate, not what you deserve."
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Salary.com “Executive Compensation Checklist." http://www.salary.com/Articles/ArticleDetail.asp?part=par181. Retrieved May 02, 2011.
AllBusiness. “How to Negotiate an Executive Contract." http://www.allbusiness.com/human-resources/compensation/925293-1.html. Retrieved May 02, 2011.
DiversityMBA. “Negotiating the Executive Compensation Package." http://diversitymbamagazine.com/negotiating-the-executive-compensation-package. Retrieved May 02, 2011.