Risk & Compliance

Your Next (and Most Important) Deal

Finance executives should be as aggressive in negotiating their compensation packages as they are when working on corporate transactions.
John MartiniJanuary 25, 2011

Finance executives are often integral members of their employers’ deal teams for the most sophisticated and important corporate-level transactions. Whether it is an acquisition, merger, or divestiture, a company’s key finance leaders are usually indispensable in evaluating and negotiating the deal.

However, something in the genetic make-up of these highly qualified professionals often prevents them from aggressively and successfully negotiating their own compensation packages. In order to help even the playing field the next time you “finance types” have to negotiate your own deal, I offer the following advice.

Demand an Employment Agreement. Push hard for this. Although compensation consultants often say you can receive the same benefits under broad-based plans, employment agreements are far more protective and not subject to the employer’s discretion to interpret the meanings of key provisions. In my experience, even those employers that have “no employment agreement” policies will often relent and provide them to CFOs and other important finance professionals.

Focus on the Upside. Your initial conversations about your compensation should be limited to so-called upside compensation. Push for a higher percentage of your base salary to be paid at maximum levels of performance. Also, ask for more performance-based equity. This positive approach will focus the decision-maker on the money you can make for the company as you make additional requests.

John Martini 1-25-11

Plan for the Downside. Ample severance is critical to ensuring that you can focus on your work and not your financial future. Between one and two-and-a-half times base salary is fairly customary for executive severance arrangements. But also request that the greater of your target bonus or the highest bonus you have received in the past three years be included as a factor in the severance formula as well. Such additional components to the severance calculation can significantly increase your severance benefit.

If you think the total value of your severance benefits in a change-of-control context could exceed three times your average W-2 compensation over the past five years, you should also request that your employer provide you a “gross-up” for the impact of the excise tax imposed on golden parachutes. While some employers have become reluctant to provide parachute-payment gross-ups, many still do provide them. If your employer is unwilling to do so, request that the “Best after Tax Net” approach be applied to your contract. Under that approach, your employer reduces your parachute payments only if doing so causes you to receive more money on an after-tax basis than you have received without a benefit reduction.

Negotiate Through Counsel. Finally, self-serving as this may sound, you will generally do better if you negotiate your compensation package through competent counsel. You will then be able to explore the limits of what your employer is willing to pay without spoiling your working relationship. Counsel can also assist by working with compensation consultants to present data advocating for your position. Over time, this approach will often result in significant increases in the value of your total compensation package.

John Martini is chairman of the Tax, Benefits, and Wealth Planning Group at law firm Reed Smith. He is involved in all aspects of the firm’s employee-benefits practice, concentrating in complex executive-compensation design, qualified plan compliance, and benefits-related securities issues. John also counsels companies on equity compensation and health and welfare.