If you’re reading this article, you’re either curious or at the winning end of a long and competitive hiring process. Either way, congratulations! Below, I distill thoughts for people navigating executive compensation negotiations. I encourage you to read my notes on why compensation before jumping to how to negotiate.
Why compensation?
For employers, the goal of compensation is to buy labor that is more valuable to the employer than capital expended for the purchase. For employees, the goal of compensation is to sell labor that is less valuable to the employee than capital acquired from the sale.
Hollywood movies and career gurus depict compensation as zero-sum, where winning for either party means getting more/giving less. Counterintuitively, the way to a “win” is indistinct on either side of the table.
[Tweet “In reality, compensation is a win-win opportunity.”]
Take an example where an employer extends an offer, n, to a prospective employee. Let’s say the most an employer will pay for a said employee is n+x, and the least the candidate will accept is n-y. It then follows that offer n is acceptable to both parties when n-y<=n<=n+x.
At the high end, n+x is a mutually agreeable solution. That may seem ideal for the candidate looking to maximize current and future earnings, but this view isn’t risk-adjusted. What if there’s a market downturn? What if there’s a change of manager? What if there’s a change of control? Each of these can be addressed through special provisions, but even the best protections are worse than the upside of employment at a valued organization.
At the low end, n-y is also a mutually agreeable solution. This may seem ideal for the employer looking to maximize current and future profitability, but this view isn’t risk-adjusted. What if the executive receives a competitive offer from a competitor? Or a player in another industry? Or the opportunity to join a board, consult, or become an interim executive at more competitive rates? Each of these can be addressed through special provisions, but even the best departure of a valued executive is worse than the upside of retention.
So, why salary negotiation? To create a win-win.
How to negotiate:
- Hold fast to your values. Compensation negotiations can be uncomfortable. These are your chance to showcase your values. In the interview process, did you allege candor? Creativity? Transparency? Humility? Put those in action or risk a bigger problem. I’ve seen offers rescinded for values misalignment. It’s unfortunate.
- Research. Companies have the benefit of advisors that give nuanced insights on compensation trends. Candidates typically have less insight. This information asymmetry can drive misaligned expectations. Invest time and effort to learn about the compensation landscape for your function, industry, and geography. It pays a big dividend!
- When possible, work with advisors. There’s ample opportunity for misunderstanding or signaling of the wrong sentiment. Intermediaries, like executive search consultants, are experts at driving from offer to hire. For candidates, executive outplacement consultants offer dispassionate and helpful advice.
- Align incentives. There’s a natural incentive alignment that is ubiquitous across compensation packages. Still, there are ways to align incentives further. Coming into a company in hypergrowth? Consider involving equity, phantom equity, or revenue-based targets to your package. Managing for profitability? Look for linkages between EBITDA and your take-home pay. Across markets, incentive-based compensation tends to increase as the scope of responsibility increases. You should expect a CEO to have a much more incentive-driven compensation package than an entry-level analyst.
- Negotiate the total package, from least to most standardized. Compensation is a lot of things. A base salary, sign-on bonus, a short term incentive, a long term incentive, benefits, perks. More broadly, titles, travel requirements, the work you do are all part of total rewards. Not every aspect of “the package” is equally negotiable. For example, a company may have internal equity obstacles that make it very unlikely for them to alter short term incentive targets… but that same company may have a lot of flexibility around sign-on bonuses. These nuances are organization-specific. Uncover them. Then, prioritize the negotiation of the least standardized aspects of your offer.
- Synchronize your what’s with your why’s. What you ask for in negotiations will carry more weight if accompanied by a why. Looking for a bigger equity package? Explain why the deferred upside is more important to you than near-term cash. Hoping to commute for the first year? Give insight into the family situation that makes immediate relocation impossible.
- Focus on the opportunity. You may not get everything you want. That’s ok. It’s your assessment of the uncertain opportunity more than the certain rewards that should guide your decision to accept an offer.
