Do You Negotiate Compensations And Study Employment Contract?

Summary: Today short-term performance bonuses play an important role in executive strategy. Companies have recognized the need of balance between the short-term and long-term capital performance awards. In spite of having been performed well at interview a company may decline your demands. In such situation you are left with only three options: accept the job; refuse the job or accept it with a clause of renegotiation after few years.

Negotiating Compensation



The decline in inflation, increased worldwide competition, and the need to keep fixed costs as low as possible has had a dramatic effect on executive compensation, according to a recent survey by the Arthur Young organization. U.S, companies have adopted a compensation strategy designed to stabilize fixed compensation costs and place greater emphasis on variable pay-for-performance compensation programs. Salary administration programs are being restructured to de-emphasize base salary as a component of executive pay by giving increases less frequently, perhaps only when the market changes significantly. Still, base salary ranges will continue to be determined by what it takes to attract and retain the kind of executives a company needs to implement its long-term strategic plan.

It is now unusual for an executive, especially at the top management level, not to participate in a short-term incentive program. Bonus payments play a key role in the total compensation package, and will represent an increasingly significant portion of an executive's total cash compensation. In many industries, CEO bonus payments now exceed 50 percent of base pay for achieving corporate targets, but average between 30 percent and 40 percent of base salary. At the middle management level, bonuses average 20 percent to 30 percent of base pay. However, the bonus payments are income at risk. You must meet or exceed the specific goals established in the strategic plan before the bonus plan kicks in.

While short-term pay-for-performance bonuses play a key role in today's executive strategy, U.S. companies recognize the need for a balance between short- and long-term capital performance awards. These long-term incentives in the past generally took the form of stock options.

However, the collapse of the bull market combined with the changes in the federal tax treatment of capital accumulation plans caused by the 1986 Tax Reform Act has changed the kinds of plans that companies use to reward executives. Companies are trying a variety of approaches, some of which are performance-based programs (such as performance shares) that do not have some of the disadvantages to the company and to the executive of the stock options plans. The long- term compensation plans will continue to change, especially with the changes in accounting procedures being initiated by the Financial Accounting Standards Board (FASB). Companies seeking to implement entrepreneurial spirit inside the corporation (i.e., to create entrepreneurs) will continue to structure their compensation packages so that they provide significant long-term rewards to those producing significant results for the company.

In the area of benefits, the 1986 and 1987 Tax Acts have had some impact on perquisites. However, companies continue to provide basic medical, death and retirement benefits for employees and executives, but shift some costs back to the employee through flexible or cafeteria programs. And, executives still have a number of options (cars, extra life insurance, participation in 401K, Matched Savings Plans, Supplementary Retirement Plans, etc.) which can be negotiated as perquisites.

The average executive compensation package in 1988 consisted of 40 percent base salary, 20 percent short-term incentives, 20 percent long-term incentives, 15 percent benefits, and 5 percent perquisites. Within those averages is a large area for negotiation. What you can't get in base salary, you may be able to negotiate in one of the other areas-and ultimately end up with more growth opportunities than if the base salary were larger.

Employment Contracts

With the increase in competition, few top executives or professionals will be offered jobs without an employment contract. Many organizations have begun to insist on contracts for their protection since recent court cases have said that offering employment is an implied contract. Even at middle management levels, and certainly at the top levels, the employment contract is almost de rigueur. But this is an area where your negotiating skills must come to the fore. You want to negotiate a contract that is equally advantageous to you. You want to begin by assessing if the job calls for a contract.

According to Catherine H. Rubenstone, head of CR Associates, a management consultancy firm in Malvern, Pennsylvania, you need to look at five key questions:

1. Is the industry particularly volatile?
    
2. Does the organization have a history of picking employees' brains, then getting rid of them?
    
3. Is the company ripe for merger or acquisition?
    
4. Will a non-compete clause severely restrict you as a job candidate in the future?
    
5. Are contracts the norm in the industry or firm?

You may request the contract yourself, after you have negotiated your compensation package and other perks. You may ask simply to have your verbal agreement placed on paper. Or the company may request the contract. Three- to five-year contracts are typical, although companies generally prefer the shorter term. The basic elements of the contract are:

1. The employment offered-the position/title and duties of the position, (these duties can be more generalized than a job description, or may be the actual job description) and reporting relationships.
    
2. The term or length of the contract, including termination date, renewal provisions, and any special provisions for early termination.
    
3. Compensation. This section generally includes a general statement about the company's right to deduct or withhold all taxes, specifics about the salary (for a specific time period, how payable-weekly, monthly, annually, if any adjustments are applicable-who determines and how often); bonus determination and when payable; stock options or other opportunities for capital accumulation; benefits offered; car or car allowance; expense reimbursement; vacations; and any other negotiated perquisites.
    
4. Restrictive Covenants
   
    
   • Covenants not to compete with specific time frames and the specifics of what is covered. You may want to check with a lawyer on this part, since some non-compete clauses have been held to be in restraint of your legitimate right to earn a living.
      
   • Trade secrets. A commonly accepted definition of a trade secret: A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula or a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers,
      
5. Termination (when, how and why)
   
    
   • By mutual consent of the parties
      
   • Upon the death of the employee (you)
      
   • At the company's option (with or without cause). This clause now appears because the company wants to retain employment-at-will rights.
      
   • Upon the dissolution, merger, termination of existence, insolvency or other reason for failure of the business
      
   • Other miscellaneous reasons (relocation, change in scope of the employee's duties, etc.)
      
   • If the contract is for a short-term project, this will be included in this section.
      
   • Severance pay.
      
6. Miscellaneous General Contract Provisions
   
    
   • The contract supersedes any and all prior agreements
      
   • The contract can be modified only in writing
      
   • If any portion of the agreement is void, illegal or unenforceable, that portion may be excluded and the balance of the contract will be enforceable
      
   • A notice clause-where, when and how any notice required by the contract will be given
      
   • A government law clause which states what jurisdiction's laws will govern the contract (i.e., the laws of Texas, California, Illinois, etc.)
      
   • The contract is brought just as you would negotiate any element of the package. Realize that you won't get everything you want, so be prepared for trade-offs. What are the key elements of successfully negotiating your contract? According to Rubenstone, they are the same ones that work in any negotiation:

 

1. Be confident-you're selling yourself. Rehearse your phrasing with a friend who can play devil's advocate.
    
2. Be patient-time for consideration on both sides can be worthwhile.
    
3. Ask questions-they keep the process moving.
    
4. Make your opponent (in this instance the person with whom you're negotiating) look good-give in on minor issues.

But even if you've done a good job on assessment and negotiation, the company may still refuse what you consider your main demands. You have three choices: Accept the job and forego the contract; refuse the job; or accept the job and in a few years renegotiate from an established position of power.