Negotiating Executive Pay

Credits: Perri Capell
Career Journal

Executives may feel they're at a disadvantage when negotiating the details of a pay package with a new employer. But you can level the playing ground by knowing your priorities and a few facts.

So many things are based on your salary, such as the size of your life insurance or your long-term disability payments.

Craig Scott, director of capital markets for Cano Petroleum, an oil-and-gas production company concentrated on the size of his stock-option package when he negotiated the pay for his job in July.  If he feels that the company's stock might be a hard sell, he requests more options than if he thinks it will be a high-flier.

High-level executives often ask financial experts or lawyers to help secure their next pay deal and work out the details. If you're a typical executive, you won't have this advantage. Knowing your negotiating priorities, the value of your current pay package versus the new employer's offer, and the going rate of pay for the job, you can bargain effectively for yourself.

Start with these three steps:
1. Determine what's most important

What are your deal-breakers? Before you begin discussions, be clear about areas where you won't budge. A higher salary may be possible of negotiated correctly. A minimum potential value of stock option grants, ask for the option-exercise price to be set at the price the stock was currently trading when he received the grant. Your job is to make the stock go up, if the exercise price is set below the current market price, "it's a freebie."

2. Know what you earn and how your offer compares to other executives' pay

Many executives don't know what they're making, say compensation consultants. "Typically, the higher they are up the food chain, the less they know what their compensation. Bone up by writing down the value of your annual salary and any cash bonuses you're due to receive. Know when your next salary increase is due and what you'd make after receiving it. Salary increases for executives are expected to average 3.8% in 2006, reports Mercer Human Resource Consulting. Find out what other executives in your function and industry are earning. Many Web sites, including this one, provide data on cash pay in various functions and industries. Start by reviewing the CareerJournal.com salary tables or the SalaryExpert look-up tool.  Place a value on each item in your benefits package, such as your medical, dental and other insurance plans, company match of a 401(k) plan and accrued vacation time. If you receive a company car, country-club membership or other perk, "put a value on it," says Alan Johnson, managing director of Johnson Associates Inc., a New York compensation-consulting firm. The average value of a company-owned car ranged from $5,444 for professionals to $11,271 for chief executive officers in 2005. The average annual cost of financial counseling was $2,705 for a senior manager and $6,060 for a CEO, the company reports.

Value any stock options you have with your current employer. For pre-public companies, this usually isn't possible. The best you can do is determined the current value based on the exercise price and your best guess of a company's future prospects. For public companies, using an online stock-option calculator can help you to figure this amount.

3. Understand a new employer's long-term incentives and the size of probable pay-outs

Employers are moving away from stock options as incentives due to new accounting rules. A long-term incentive package for executives now might include stock options, restricted stock grants (shares that vest after a certain period of time) or another type of stock grant based on performance. Since long-term incentives are typically linked to company performance, knowing a company's past history of incentive payouts can help you calculate the potential value of any long-term incentives you're offered. Ask what a company's history of payouts is relative to the target goals in its long-term performance programs.  If the plan funded at 75% of target for the past three years, then you should discount your incentive opportunity by 25%.