Avoid this mistake when you’re negotiating executive pay
Money isn’t everything—for real, it’s not. Look beyond your salary offer to maximize your long-term earnings.
As you travel up the ladder to the executive level, chances are your salary negotiations will be different than when you were a mid-level employee. Your paychecks will get fatter—and more complex. You’ll still likely receive a salary, but it might represent a smaller share of your potential earnings.
“Profit sharing and bonus options, especially long-term incentives, are a critical part of executive compensation packages,” says Teela Jackson, vice president of talent delivery with Atlanta-based Talent Connections. “Those long-term incentives can make up 40% of the overall package.”
If you overlook those components and focus mainly on your salary, you’ll likely leave a lot of money on the table. Follow these pointers to make sure you cover all your bases in negotiating pay at your next job.
Gauge the push and pull
Employers have a wide range of approaches when it comes to executive compensation, Jackson says, and you need to know where your prospective employer lands on the spectrum.
Look to see where most of your pay would come from. Is the compensation package cash-heavy? This would mean it has a relatively high upfront salary or cash bonus structure and fewer equity incentives. Or, is it equity-heavy? This package might factor in more stock options or other ownership-based incentives and a smaller base salary.
“The company’s pay philosophy simply lets a potential executive hire know where there may be flexibility,” Jackson says. “You can use that to push for more long-term incentive options—or, on the flipside, you could load up on the base, plus include a sizable sign-on bonus if the long-term incentive package is not competitive.”
Use your personal financial situation as a guide to what kind of package is more attractive, says Andrew Avellan, a certified financial planner and founding partner of the Philadelphia Wealth Management Co. in Bala Cynwyd, Pennsylvania. A cash-heavy package is better if you need higher short-term cash flow, but if you aren’t in immediate need of big-money paychecks, a little patience can pay off in the long run.
Dig into the details
Now that you know how your income will be divvied up, it’s time to translate those line items into actual dollars. Spend time mapping out what different aspects of the offer can be worth, under a mix of likely scenarios.
Figuring out the exact payouts of short-term, fast-maturing options or multiple-year options and stock-purchase rights can be especially tricky, Avellan says. “Calculate what each package might be worth using several predictable outcomes,” he says, “such as stock price with good growth, no growth or loss, as a way to attempt to put some math around a decision.”
Also, make sure you understand the exact terms for exercising stock options and the accessibility of payout options. Certain stock options run the risk of being excessively taxed or becoming worthless, Avellan says. Likewise, get specific details about any supplemental executive retirement plans and pensions if those are being used as part of your long-term incentives.
Treat this like a marathon, not a sprint
There will likely be short-term perks on the table, as well, but try not to get dazzled by them. A car allowance, club allowance, relocation services and temporary housing are nice, but they won’t directly fund your retirement. At this level, what matters is the potential and likely value of your entire compensation package over time.
Focus on long-term incentives such as stock options, restricted stock and phantom stock programs, says Mitch Wienick, president and CEO of Kelleher Associates in Wayne, Pennsylvania. “Anything that has a time horizon that exceeds a year is considered long term,” Wienick says.
Some options may become available to you over a number of years, so you should weigh how those will pay out at each interval, Wienick says. You might also consider what becomes of those options if you leave your position in two years; it might be negotiable whether or not you get to keep them for a time if you quit.
Use your personal financial situation as a guide to what kind of package is more attractive, Avellan says. A cash-heavy package is better if you need higher short-term cash flow, but if you aren’t in immediate need of big-money paychecks, a little patience can pay off in the long run.
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