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Getting Plenty, and Making Sure While Negotiating Your Employment Contract

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I recruited an executive we'll call Bill, who had built the fastest-growing business in its field for Conglomerate X. The CEO of Conglomerate Y wanted him to take over an operation of equal size and much greater potential.

The attraction...besides an exciting challenge...was a contract, which gave Bill a percentage of increased-profit. Moreover, Bill couldn't be fired except "for cause." Salary was well above Bill's current base- plus-bonus, and the deal was designed to more-than-double his pay after a couple years of his dependably excellent management. Within five years Bill...who was enthusiastic about the opportunity...should have earned about $1.2 million per year, three times his current compensation.

The employer's and the candidate's lawyers both helped queer the deal. The CEO of Conglomerate Y wanted Bill's contract signed within 72 hours, to provide extra news at a previously scheduled Monday afternoon meeting of securities analysts. A contract was hastily prepared by company lawyers who, unfortunately, included a clause they use with executives who don't get Bill's deal.



The flawed document was zapped to Bill by facsimile late Friday afternoon. His lawyer pointed out the offending phrase as "bad faith" by the over-eager CEO, who could legitimately be accused of "applying time pressure" toward hasty acceptance. Bill had been invited to call the CEO at home over the weekend with any questions. He didn't. And meanwhile, Bill's current CEO called Bill and pressured him to stay.

Result: Instead of calling his new employer on Monday morning, as agreed, to confirm he'd signed the contract, Bill called to say he was backing out. Shocked, the CEO offered to let Bill's lawyer revise the wording as he saw fit. He also offered to forgo the announcement in favor of any more leisurely schedule Bill preferred. Too late. Bill had been wrongly convinced that his prospective employer was looking forward to breaking the contract.

Percent-of-profit deals with no cap and no time limit are exceedingly rare. Bill will almost certainly never be offered another one. Indeed, almost no executive ever gets such an opportunity.

But there's a bit more to this story. Although Bill was thrilled with the opportunity, he and his family disliked moving from the "Sun Belt" to the residential suburb of New York, where the business is located. So his lawyer's advice reinforced other qualms. Ironically, Bill's current company soon promoted him to their Manhattan headquarters. Now he lives in a town very near to where his once-in-a-lifetime opportunity is located. But instead of a five-minute drive to the office, he has an arduous daily train ride. up about 70%. This young man receives only ordinary compensation. Bill, on the other hand, would be earning twice what he does with his current company, even after a big raise that accompanied his promotion and relocation.

In both incidents, lawyers served as "sounding boards" and "counsiglieri," when excellent executives were emotionally vulnerable. It's one thing to be coldly analytical and decisive when dealing with business problems...and quite another when weighing an irreversible change in your personal circumstances. Then you reach out for...and cling to...the advice of your lawyer. More than at any other time, you're likely to let someone else help you decide, rather than merely provide further input for your own objective decision.

Interestingly, the lawyers engaged by both executives were personal friends... supposedly eminent attorneys, and supposedly working for far less than their customary fees. How easy it is to give undue weight to the comments of a lawyer who's your friend, and confirms that friendship through a low fee.

I bring all of this to your attention for a reason. If and when you negotiate an employment contract, chances are you'll turn to a personal friend who's a lawyer for advice. From experience I know that's what almost every executive does.

Please be careful.

You've experienced the universal tendency of lawyers to screw up every kind of deal. Know right here and now that they...your friends included... will have just as much tendency to screw up your break-through employment opportunity.

Your Compensation

You'll try to get everything you possibly can, and you'll make sure it's all written into your contract: substantial base salary, maximum bonus opportunity, and maximum participation in all of the company's most lucrative stock- related and deferred-compensation programs.

Go for it!

If you'll report just one or two layers below the Chief Executive, be sure to study the company's 10-K and its Notice of Annual Meeting/Proxy Statement, listing compensation arrangements at the top of the pyramid. And do it before your compensation is discussed. The best indication of what you can try for now...and work toward in the future...is to find out what your boss is making, or failing that, what her boss is making.

Chances are, the biggest biggies are covered by programs that don't extend much lower. But you might as well ask whether you're in on a lesser share of the same deals they get. If not, the deal just below theirs? Or a third-level deal? How many people qualify for the highest-echelon incentive compensation program you will participate in? The top 15...or 50? Or the top 5,000?

Despite all the glowing words about how important you'll be, nothing is a clearer indication of where you really rank than the echelon of the compensation programs you do-and-don't qualify for. Moreover, some polite pre-employment curiosity may get you included in higher programs, if the goodies your prospective employer is planning for you don't quite match the flattery he's handing out.

When it finally comes to writing your compensation into your formal "Employment Contract," there are virtually no pitfalls. Without your having to argue and push, the document willfully and firmly state what you're getting.

Why not? After all, the spotlight is on your compensation. It's the star of the show! It's your inducement to sign the rest of the document. It's what the magician wants you to see; whereas up to now we've been on the lookout for what he might be doing with his other hand...possibly tying a slip-knot on the contractual straightjacket you're lacing him into.

Notice that you immediately get your hands on lots of stock. Letting the jackals have it at their inflated takeover price will be sweet revenge. And even if you're not high enough on the pyramid to enjoy a "parachute," you'll probably get control of a lot of your "granted" and "optioned" stock, when the corporation that promised it to you goes out of existence. You, too, will probably enjoy immediate payment at what will surely be a near-term, and maybe an all-time, high price.

And there you have the jargon of compensation, as it relates to your employment contract. Please understand that the above definitions and suggestions are not intended to provide legal or tax advice. For that, you must engage a competent professional and make him or her aware of all the specifics of your documents and situation.

Unless you're headed for the very apex of the corporate pyramid, you'll have to content yourself with the compensation programs that serve you among many other executives. But make it a point to find out what programs the company has, and try to get yourself included in the highest-level ones you can possibly qualify for.

At this point, I've done all I can to help you reach for a wide slice of the corporate pie. Knowing the terms and techniques we've discussed will help you press for the best possible deal...and to document that deal as firmly and cordially as possible.

We've wound up by talking about what you may encounter in negotiating and drafting a formal "Employment Contract." But don't forget that you can also get good written evidence of your employer's commitments in your "offer letter," and in various other letters and memos that will pop up over the years. Save everything in writing that makes a promise to you.

Corporations forget.

To protect your interests, it's up to you to remember.
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