Batter up. Negotiating executive compensation in the big leagues

By Sandra Weeks
|Canadian HR Reporter|Last Updated: 10/18/2002

In this economic climate, “job security” is about as dead for the executive as it has been for the regular employee.

Severance arrangements bridge the gap between jobs and are now a fixture in the employment relationship.

For the employee, the term “employment security” through continual learning of new competencies has been around for a while, and replaced what used to be called job security. Changing employers frequently is part of the employment deal.

In the past year or so, this same deal is starting to apply to executives. Churn at the top is becoming as common as it is everywhere else in the organization. Executives are subject to intense shareholder scrutiny on disappointing corporate performance in a volatile and difficult market at the same time questions are being asked about several years of rising executive compensation.

Boards are responding to shareholder pressure and are re-examining board processes and practices. Executives no longer expect a job for life. Both parties know the employment relationship will likely not last forever.

The difference between severance for regular employees versus executives lays in the definition of job security, the size of the stakes, and the amount of risk assumed in a role. Executives are acutely aware of the pressure they will face to perform as well as the risks associated with a new employment situation. Since the executive compensation packages are larger, the stakes are higher as well.

If the circumstances leading to termination are beyond the control of an executive or employee (a merger or a change in leadership team) and the individual is an innocent bystander, a somewhat more generous severance package may be in order than if the circumstances involved some degree of cause or inadequate performance.

The standard

Severance arrangements for executives differ from those for regular employees (see box, page 8) just as executive compensation is different from employee pay.

A typical executive severance consists of one-year salary, benefit continuation for the length of time of the severance and the cashing out of shares and options. The package may also include a car allowance for a defined period of time, financial counselling, career counselling or outplacement assistance, a computer and continuation of any other perquisite the executive received.

A more generous agreement could include two years salary, payout of bonus, changing of the vesting period to allow for more options, club membership for a period of time. The stakes get even higher if there is a change in control of the company. This is typically negotiated as a separate part of the employment agreement and would likely increase the size of the severance package.

Critics have charged that executives not only pay themselves too well but also negotiate overly generous severance packages.

Part of the reason for this is that trust in corporate executives is at alarmingly low levels. Media coverage about executive compensation and severance packages comes at the same time employees are expected to work harder and shareholders are losing money; trust in leadership continues to erode. We are now realizing there was an economic value to trust. It made employees and shareholders accept decisions made by executives without challenge or pushback. This is no longer the case.

The job of an executive is getting harder, not easier. Expectations are higher, the demands are more specific, the questions from shareholders and employees are more direct, and the challenge of navigating an organization through difficult economic times, has never been so great. The risk of failure is high, so executives want to know they will be compensated for any hit their professional reputation may take.

Expect tougher executive negotiations in the future

Executives are acutely aware of the pressures to perform. They enter into the negotiation process knowing that the stakes are high and the tenure short. So, it makes sense to negotiate the exiting strategy at the same time as the entry. A beginning negotiating strategy for the executive is to ask for the moon, and settle for something less.

Boards, having come under the scrutiny of shareholders and public allegations of excessive executive compensation, are becoming more conservative and cautious. Board members must find the right balance between the need to hire the right person, to offer an attractive employment situation and protect shareholder interests. Boards will begin the negotiating strategy offering the basics, which may be less than what current executives enjoy.

What they eventually agree upon depends on how much the board wants the executive versus how much the executive needs the job.

Are you hiring an executive or a baseball player?

In some ways executives are becoming more like professional athletes.

There are high performance expectations, the nature of the employment relationship is fleeting, the size of the compensation packages are significant, there is high turnover and a limited talent pool. Most importantly, both the executive and board have been burnt by previous employment relationships. Each has a lot in stake in protecting their own interests. They are insisting on employment agreements that define performance expectations, terms and conditions of employment, change in control procedures, non-competition agreements and confidentiality agreements. Everything is negotiable.

Sandra Weeks is the principal of HRP-Human Resources Inc., a compensation and total rewards consultancy. She is the co-author of Carswell’s Best Practice Series on Performance Management. (www.carswell.com.) She may be reached at (905) 852-1141 sweeks@hrpcanada.com or visit www.hrpcanada.com.

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