Big Red Car here. So, we were talking about the provisions of the C level employment agreement. We last spoke about the definition of the “position”.
Do you recall that? Here it is: “C” Level Employment Agreement — Position
Today we are going to start speaking about the issue of compensation starting with “salary.”
We previously spoke about the design of such compensation programs here: The Design of Compensation Packages for C Level Execs and Senior Management
Salary is often the easiest of the elements of compensation to discuss and often has the most focus. Remember a well designed C level compensation package includes: salary, benefits, short term incentive compensation, long term incentive compensation and something “special”.
So salary is the first step on the journey to a well designed compensation program. If you screw this step up however, it really doesn’t make any difference what you do for the rest of the journey, you are not going to keep your CEO for very long. Changing CEOs is very expensive. Think about that BEFORE you start quibbling on salary.
How much is enough?
At the end of the day, a Board of Directors is going to have to pay a CEO or CFO or COO or CIO or CMO or CTO what the market tells them they are worth but more importantly, as the first building block of a well designed compensation program, what is going to put the CEO in the right frame of mind to work like a rented mule to deliver shareholder value.
Incentive compensation can reward performance but salary is just rent.
A Board should do sufficient research to ensure they know the market numbers either directly or through a consultant. Know the numbers. Be informed and share this data with the CEO. Start with the same numbers in mind.
The Board should be clever and ensure they know the averages — the best of the worst and the worst of the best — and how much they actually intend to pay as a matter of qualitative policy. It is always a mistake to say “we’ll pay you the average for your position” unless, of course, you are looking for an “average” performance.
The Boss always likes to start the conversation by saying — he intends to pay at least 125% of the market price (not the average price). In many ways this is a gratuitous statement because you will ultimately agree on a specific number but the philosophical notion as to how you arrive at it will be very important to the working relationship between a CEO and the Board.
Who negotiates the salary?
Many Boards will delegate salary negotiations, rightfully so, to the Board Compensation Committee. Be careful about who is appointed to this committee as this committee can flavor the relationship with the CEO for all time. Don’t put the brash Wharton guy with the mousse in his hair who thinks all CEOs are really just rented mules on the committee. Let me repeat that — don’t!
Put folks who have people skills and who are diplomatic in dealing with ego massage. There are such folks out there and you will likely have one your Board.
The most important thing a Board can ever do is simply to engage the CEO in a dialog and ask her — “what do think is “market” for your position?” In most instances, you will get an answer you can live with. If not, maybe she is not the right CEO for the company?
Pro tip: don’t haggle with your CEO about salary. Get him excited. You can haggle about the other things but not salary. Make a deal. Make a good deal for the CEO and then move on. Getting this right first allows you to use that goodwill to get the Employment Agreement flanged up smoothly.
The Devil is in the details
So, now you have a sense of what is the “right number” for salary and it is time to think about the details. Here are some details that Boards and CEOs should focus on quickly before they leave the issue of salary. These comments are intended for the CEO and Boards should pay attention also.
1. What are the plans to increase salary — performance based increases, automatic annual escalations, cost of living increases, changes in taxes — over the term of the Employment Agreement? Should the salary component be fixed over a five year Employment Agreement? [Big Red Car says “no” but what the Hell does a Big Red Car know about it anyway?]
2. How will you incorporate changing tax considerations in the future? Remember you can only spend the after tax dollars, so tax policy is a fair consideration in a thoughtful salary scheme.
3. Are there any provisions for deferred compensation — we will talk about this more when we get to “something special”. Deferred compensation is complicated but it can be very rewarding and can provide an opportunity for a thoughtful Board to build loyalty and continuity.
A word to CEOs
It is important for CEOs to get the deal they want at this instant in time because it is very unlikely that it will be revisited in a meaningful way in the future. If you perform particularly well, the Board is going to think they got what they bargained for — a great CEO — or that your rewards are in the incentive compensation portions of the compensation design. Know this and act accordingly.
Make sure that you provide pointed input on an annual basis as part of your annual Performance Appraisal — oh, yes, we will talk about that a bit more later — and you ask for an annual increase or that salary is automatically increased in accordance with the terms of the Employment Agreement.
Once you have signed that Employment Agreement, the negotiations are over. Know this.
In business, you do not get what you deserve, you get what you negotiate.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.