By Robert A. Adelson, Esq.
Although executive salary data can readily be found in online recruiting websites and executive compensation surveys by Gartner or Mercer, many C-suite executives still wonder if they are getting the salary, bonus and equity that they deserve, especially when they have special attributes and are hired with specific objectives in mind. For those situations, I have developed a model for custom executive compensation packages to address their needs.
When Would You Seek a Custom Executive Compensation Package?
There are three major circumstances that call for a custom executive salary and compensation package:
- Start-up and early stage company CEOs – these companies often cannot afford the proper executive pay, so a custom package may be necessary to complete the recruitment for the benefit of both parties.
- Turnaround CEO situation – if a company has performed poorly, is in a downward spiral so its very survival is unclear, and very much needs the right executive to right the ship, then the risks being taken merit a custom compensation package.
- Special needs C-level executive recruitment – if the executive has special attributes that fill a critical need for the company, especially in times like these, where people are hard to find, those special attributes or key company needs justify a custom package.
Questions to Ask Yourself
To come up with a salary, bonus and equity compensation proposal, you need to ask yourself: what do I need to make this move. Your future employer must not only make up for your loss of pay and benefits but also compensate you for
- Loss of comfort. You are well established and perhaps a rising star with your current employer. If you go to a new company, you will need to prove yourself again, without your current champions.
- Loss of platform. Your high standing in your field is known where you are. You are actively sought after by recruiters. With this move, you might be going to a less visible industry or field.
- Loss of opportunities. This may be a very good opportunity, but you may get other new and even better opportunities in the next two or three years. If you commit to this offer, you will be off the market for at least this period.
What Should Be Your Executive Salary, Bonus & Equity
Surely, you want your new compensation to at least match your current package in salary and benefits. If the salary is not matched, the contract can provide for “springing” salary that more than makes up for what you’ve given up as success is achieved. There are companies that can provide services to match your benefits to those offered at your prior firm.
The equity component of your executive pay is most important. If the company is a startup or in a turnaround situation, its gross assets may well be under $50 million. If so, you would want the company to be structured as a C corporation and be issued Qualified Small Business Stock (QSBS), where potentially the first $10 million of capital gain can be excluded so that there is no Federal taxation and all further gain above that would be at lower capital gains rates. Where the company is an LLC, then you would seek profits interests, where the threshold company and per unit value is clearly stated and you could potentially get capital gains treatment on later sale of your units at a price above the threshold.
Where the company is a family business or other business that won’t issue actual equity, you would want a customized package centered on phantom stock.
In each of the above approaches, you want a tie between the compensation and terms of employment, so there is requisite vesting if you quit for good reason or are terminated without cause, or increased acceleration on change of control of the company.
How much equity should you get? If the company is not public, which is generally the case with startup and emerging companies and many turnarounds as well, then you should discuss amount of equity in terms of your percentage of the fully diluted equity of the company. Your future employer may try to get you focused on number of shares – but it is best to start with percentage and then have the company represent to you that the shares are equal to the agreed upon percentage.
Your percentage interest would depend on two factors: what will it take to get you to make a move, and what’s your presence worth to the company?
Getting Your Prospective Employer to Buy-in
To sell the company that you should get 6% or 8% or even 10% when the Mercer metric recommends 3%, or you should get options rather than QSBS, I, as your executive compensation attorney, would use the following arguments. (References to “you” are to the company with whom we are negotiating.)
- You want an “A” player. My executive is the best or one of the best in his or her field. Not having an “A” player in your team could make the difference between success and failure. Furthermore, it will diminish your ability to attract other “A” players, attract capital investment, and to enlist other stakeholders.
- You want alignment. Give my executive the salary, bonus and compelling equity interest that fully aligns him or her with the company’s growth goals and you will assure his or her long term commitment.
- Success for my client means even greater success for you. Even where my client retains a 6% equity position through to the IPO, it means the other stockholders hold a 94% position and hence enjoy even greater gains.
You can deploy similar arguments to achieve the kind of results as I have done for my clients in the past. But clearly, an executive employment attorney, skilled in tax law as well as corporate, securities and contract law would be able to provide invaluable assistance in these matters.