compensation negotiation discussion

[globetrotter]

Ok, here's the question - opening this up for reasonable discussion. If you are a college kid living in your parents' basement, please read and don't comment.

I am in negotiation with my CEO over my bonus package for this year. My base salary is good enough, no complaints, and I can't reasonably ask for more or complain - they give me 4-6% every year without asking. My benefits are outstanding. I like the company and the job and my team and I love my boss (not CEO, VP).

I was brought on board to grow international sales. For 30 years, our international sales didn't grow. We are the US leader in what we do, with 60% market share. The rest of the world has always represented 2% of our sales -and half of that was Mexico.

My original package offered me a 15% (of base salary) bonus for growing 10% a year. This year I will grow sales by 50%. I asked for 1% salary per 1% growth. They basically said yes and wanted to cap it at 20 %, after initial negotiation they then offered to cap it at 30%.

What I want is to earn about 150% of my base for 5 years, as we grow, and then go down to about 120% of my present base - which will happen with 4-6% annual increases in base and a small annual salary. I will grow my sales about 800% over the next 5 years (from starting point) and then it will plateau to 5-10 % annual sales, and I will represent 25-33% or so of overall sales. I don't mind making less than the domestic guy over the long term, but I want the 5 years of growth to put money in my pocket so that I can buy a house and load up my retirement fund and my kids education funds.

The CEO's argument is that at 50% bonus, I would earn more than the Domestic Sales Manager, who is responsible for 15-20 times as much sales as I am, but won't grow more than 2-3 % a year in the coming decade. He has just been moved up the ranks, when the guy who built up the domestic market 200% over the past 10 years left. The domestic sales guy is also about 10 years older than me. In some ways his job is harder than mine, in most it is easier. I could do the domestic guys job, he couldn't do mine. Also, the cost of every dollar that I sell right now is much higher, and will probably always be a little higher, due to the distances and so on involved in my market.

The company is very old, mid size, family owned. In the past year we have lost 3 people of my rank, 2 good, due to disputes with the CEO and how he does things. I want to stay with the job long term, but I want to be well compensated.

Right now my team has frozen sales during the negotiations, I can hit 20-30% growth this year (yes, 2009) without us doing any more work, and damned if I am going to hit 50% growth and only get compensated for 30% - it will also cost me money next year because my base line for growth will be higher.


My argument is as follows:

1.\tmy job is harder, and it would be harder to find somebody who can do what I do
2.\tI will add about (very conservatively) 50-100 million in value to the company should they ever want to sell the company (possibly I am adding as much as 150 million in value). We are going to be number one world wide in what we do in 3-5 years, with an additional 20 million in annual sales.
3.\tI will be putting $10 mil a year (gross profit) in my CEOs pocket more than he had before
4.\tif he were to pay me a bonus of 20 K a year for 10 percent growth for 80 years of growth instead it would be $1.6 mil for growing 800%. I am asking for 300-400K in bonuses over 5 years. On top of that is the value of the money - getting the growth in 5 years instead of longer.


So here is the question - anybody see a basic flaw in my argument? Anybody have a better argument? Anybody have any thoughts as to why I am wrong or right?

 

[randallr]

No flaws. I just wouldn't get heated in the discussion. You seem to be awesome at what you do.

 

[gdl203]

A few thoughts:

1. Understand the boss's main hot buttons - is it simply cash $ out, his desire to not compensate you more than the domestic guy, is it a principle of max % of base, titles, bonus pool for your team? What does he consider fair? Work with that. Definitely open the door to let him tell you what will make you richer next year and the next.

2. Don't over-sell yourself and promise too much - much better off creating a comp structure for future years based on moderate expectations that would provide for incremental upside

3. Offer several alternatives with same value to you but varying mix of considerations to help CEO think about his priorities. See 1, work around his priorities to get to the best outcome for you.

4. Private family-owned company? Old CEO? No son in the picture? 60% market share? Get as much equity as you can. Now. This thing will trade - for sure - and that will be the single most important wealth creation event for you. IMO, you can definitely trade off immediate cash request for higher equity.

I would add that, as a sales guy, this is a true test of your capabilities too. Stay commercial, conciliatory, even-tampered, work through various proposals and don't let the deal slip away.

 

[Thomas]

Originally Posted by gdl203

A few thoughts:

1. Understand the boss's main hot buttons - is it simply cash $ out, his desire to not compensate you more than the domestic guy, is it a principle of max % of base, titles, bonus pool for your team? What does he consider fair? Work with that. Definitely open the door to let him tell you what will make you richer next year and the next.

2. Don't over-sell yourself and promise too much - much better off creating a comp structure for future years based on moderate expectations that would provide for incremental upside

3. Offer several alternatives with same value to you but varying mix of considerations to help CEO think about his priorities. See 1, work around his priorities to get to the best outcome for you.

4. Private family-owned company? Old CEO? No son in the picture? 60% market share? Get as much equity as you can. Now. This thing will trade - for sure - and that will be the single most important wealth creation event for you. IMO, you can definitely trade off immediate cash request for higher equity.

Good call on #4.

 

[gdl203]

Originally Posted by Thomas

Good call on #4.
Professional bias

I've worked on enough M&A transactions to know that management teams with decent equity participation get more money than they could imagine. Not to mention that the buyer will want to retain the best performers with attractive packages, promotion, etc...

Same goes for IPO if owners decide it's a better monetization route.

 

[globetrotter]

Originally Posted by gdl203

A few thoughts:



3. Offer several alternatives with same value to you but varying mix of considerations to help CEO think about his priorities. See 1, work around his priorities to get to the best outcome for you.


thanks - do you have any ideas? basically, what I want is to be compensated on the growth curve - whether it takes 3 years or 10 years, and not have a large chunk of growth that falls outside of my comp plan.

another thought that I had was to ask that the baseline for every years growth start at the top point of the previous years compansation ceiling - so if I grow sales to X million, but only get compensated at x-2, the next years base line is x-2. that would mean that when the growth slows I would have a year or two of enjoying the compensation from the growth curve. I don't know if he will go for that, though.

4. Private family-owned company? Old CEO? No son in the picture? 60% market share? Get as much equity as you can. Now. This thing will trade - for sure - and that will be the single most important wealth creation event for you. IMO, you can definitely trade off immediate cash request for higher equity.

I wish - 2 sons a daughter and a half dozen cousins. I wish I could get some equity, I'd take a serious paycut for some equity. nobody who isn't a blood relative has a single share, including my boss who has been there for 27 years.

but any ideas are welcome - I am hitting a wall and I really am not going to walk over this, I jsut want to get the best deal I can.
I would add that, as a sales guy, this is a true test of your capabilities too. Stay commercial, conciliatory, even-tampered, work through various proposals and don't let the deal slip away.[/quote]

 

[gdl203]

Why don't you change the incentive comp to one based on $ sales in your coverage, rather than % growth? That would achieve the same result as resetting the bar as you're explaining it, but without the added complication.

Ideas re mix usually include immediate cash bonus, cash deferral schemes (large bonus but vesting over 2 or 3 years), non cash compensation (company car, gas, travel, expenses, vacation days, etc...), stock (apparently not an option), employee participation. It's really important to understand what he is choking on, how he ranks all the elements of your compensation in order of importance for him.

Sucks on equity. How about equity-like securities? Something that would not give you any voting rights or dividends but a participation in the monetization if/when the company sells? Still a no-no?

 

[globetrotter]

Originally Posted by gdl203

Why don't you change the incentive comp to one based on $ sales in your coverage, rather than % growth? That would achieve the same result as resetting the bar as you're explaining it, but without the added complication.


yeah, I'd prefer commisions, but in my company people at my "level" get compensated on growth - one level below on sales, one level above on profitability. written in stone.

Sucks on equity. How about equity-like securities? Something that would not give you any voting rights or dividends but a participation in the monetization if/when the company sells? Still a no-no?

yeah, one of those things that was explained to me when I was recruited.

that is actually the driving force behind my issue now - I know that I can't ever expect any kind of big payout in the future due to the nature of the company, and I know that when my growth curve slows my compensation will, too. so I want to have a few fat years, with the expectation that I will then have 20 leaner years if I stay on.

 

[gdl203]

Originally Posted by globetrotter

yeah, I'd prefer commisions, but in my company people at my "level" get compensated on growth - one level below on sales, one level above on profitability. written in stone.
Get to that one level above. Make it part of the package - a clear path to that level, with milestones to hit.

 

[Piobaire]

How about decreasing returns? 1:1 until that 30% cap is hit, then 2:1 (2% growth, 1 % bonus)? Something like that, so you two can meet half way? It can have several brackets, 2:1 on 31-40% growth, 3:1 41+, etc.

 

[globetrotter]

Originally Posted by gdl203

Get to that one level above. Make it part of the package - a clear path to that level, with milestones to hit.

thanks - actually that is the other problem: my boss has about 15 years till retirement, and she isn't going anywhere. not that I want her to go anywhere, but it was also pretty clear to me on recruitment that there is no real room for my advancement. in all probrability, when my boss retires a family member will take her job.

but I am honestly fine with that - I love what I am doing, and wouldn't really want my bosses job.


one of the options I had thought of was try to change the game - shift to P&L in my present position. there may be a way to do that. but that is somewhat of a risk. I may leave that as an option.

anyway, thanks.

 

[globetrotter]

Originally Posted by Piobaire

How about decreasing returns? 1:1 until that 30% cap is hit, then 2:1 (2% growth, 1 % bonus)? Something like that, so you two can meet half way? It can have several brackets, 2:1 on 31-40% growth, 3:1 41+, etc.

that is actually where I think it will go - but that leaves me about 20K less a year than I would like over the next 5 years. it really hurts me to walk away from 100K. I'm trying to find a way to close that 100K gap.



the real limiting factor seems to be the issue of my collegue - the director of domestic sales. his comp plan doesn't allow him to make as much as I want to make, and my CEO can't get past the fact that domestic represents 20-30 times as much dollar value in revenue as international.

 

[Piobaire]

Originally Posted by globetrotter

that is actually where I think it will go - but that leaves me about 20K less a year than I would like over the next 5 years. it really hurts me to walk away from 100K. I'm trying to find a way to close that 100K gap.



the real limiting factor seems to be the issue of my collegue - the director of domestic sales. his comp plan doesn't allow him to make as much as I want to make, and my CEO can't get past the fact that domestic represents 20-30 times as much dollar value in revenue as international.

It's a tricky situation. Pitch him on a market of 6 billion people vs. 300 million, not putting your eggs all in the domestic basket, etc. Pitch him on increased risks to your person, which is worth ocmpensation, due to all the international travel. Also work in that you should not be measured against the limits of someone else. Tell him to think at the margins, and that you have greatly expanded those.

 

[gdl203]

Growth in and of itself is an absurd incentive, especially if there is a cap on the relationship with comp. It actually works as an incentive to limit growth to that cap and defer sales to the following year, rather than getting people to the highest possible sales performance. If you're able to articulate this (maybe with a numerical example where, under your CEO's proposed comp plan, you would be better off and the company worse off over a 5 year period - limited overall growth for Co, but maximized comp for you by creating higher % number y-o-y), you should be able to get somewhere where your performance is better aligned with your comp.

 

[globetrotter]

Originally Posted by gdl203

Growth in and of itself is an absurd incentive, especially if there is a cap on the relationship with comp. It actually works as an incentive to limit growth to that cap and defer sales to the following year, rather than getting people to the highest possible sales performance. If you're able to articulate this (maybe with a numerical example where, under your CEO's proposed comp plan, you would be better off and the company worse off over a 5 year period - limited overall growth for Co, but maximized comp for you by creating higher % number y-o-y), you should be able to get somewhere where your performance is better aligned with your comp.

I have to say, to my CEOs credit, that he used a similar system during the growth of the company in the domestic market - he actually penalized growth over 12%, with the idea that too rapid growth would be unsestainable and would hurt the company. it was a good strategy.

but the growth of my market is very different - we have the manufacturing and financial capacities to handle the growth that I am driving.

I think that the best argument that I can make is the cost of money - that if I can bring the projected growth in 5-7 years instead of the 15-20 that would follow his projected growth path then we have 10s of millions of dollars earlier rather than later, and that has value. does that make sense?