Compensation

By Scott Hill 

More so than in recent years, economic strength has resulted in a relatively competitive job market and talented executives are in high demand.  When a new job opportunity is presented, candidates are forced to weigh their options.  They benchmark the potential position with their current position and compare their responsibilities.  How do they differ?  How are they similar?  Most often, the next comparison is with the pay and incentives.  Making a move at the executive level is a big undertaking, and many factors should be considered before accepting an offer.

Non-Cash Compensation

Salary, or cash compensation, is a straightforward comparison.  Evaluating non-cash compensation is where the difficulty arises.  It must be done, however, in an accurate fashion in order to correctly gauge the total value of the compensation package that is being offered.  Benefits such as stock options, insurance, retirement plans, vacation, and other perks all affect a job offer’s value. With benefits packages growing more elaborate, these attributes are not easy to compare from one package to the next.  Although difficult, it is important that an executive attempt to assign a monetary value to all components of the offer. 

As an example, consider stock options.  If a company includes an equity (stock option) component to a job offer, it is possible to assign a theoretical dollar value to that portion of the offer.  Although there are obviously many assumptions that would need to be made concerning the company’s future performance, as well as future financial market conditions, this value can be utilized to better compare two jobs.  It’s also worth noting that regardless of any theoretical monetary value an executive may be willing, based on subjective factors alone, to substitute future equity appreciation for current salary.

In our example, however, the comparison does not end with the decision of future equity versus current salary.  As a secondary consideration, the executive should also evaluate the form of any equity grants.  Traditional non-qualified stock options may not have any value upon vesting if the company’s stock price is below that executive’s “strike price.” This is the price that he or she must pay for the shares when options are exercised.  However, if the company is offering equity in the form of restricted stock, it does not have a “strike price” and passes to the executive automatically upon vesting. In this case the executive will realize some dollar value regardless if the company’s stock price is low.  

Tax Consideration

Another prime factor that should be considered when evaluating a job offer is taxes.  The position under consideration may expose the executive to new taxing jurisdictions.  Owing taxes in new, or possibly multiple new, jurisdictions may greatly increase the executive’s cost of tax compliance.  Likewise, it might also be necessary to redraft wills based on estate tax planning issues.  It is important to determine if the new company will bear these costs, or if the executive will be expected to shoulder the burden.   

Lifestyle Choices

Financial issues aside, lifestyle is another major aspect to be considered when deciding on a new position; especially if the new job involves moving.  Typical lifestyle considerations include the cost of housing, the costs for daily living and the necessity of commuting – which can involve a large amount of time.  Other matters that are sometimes overlooked involve family considerations.  For example, will children be able to attend a public school, or would a private school be necessary?  Private school tuition can be substantial.  Also, depending upon what part of the country or world the new position is located, increased insurance coverage (such as flood or earthquake insurance) may be necessary.  Other costs could be associated with the need to hire domestic help.  Compensation for any of these services should be determined during the negotiation process.

Considering a Change for the Long Term

It’s also important to think about the future when evaluating a new position.  Consider how employment termination would be handled in the event of a change in ownership.  Often times, larger and more established companies have some sort of transition plan in place for their executives.  If your current position offers a multi-year contract and substantial retirement plan, this safety net makes accepting the new position more of a financial risk.  Negotiate a similar contract with any new position so there is no long-term loss in compensation.

In addition, analyze the company itself, its product or service and growth potential. Doing appropriate due diligence is important in determining if the company and position are a good match now and later.

A Win-Win Outcome

Negotiating is important while attempting to equalize the dollar value of two positions and could help to make the decision easier.  An important thing to remember when negotiating a job offer is not to allow it to become an adversarial process.  Negotiations that make both parties unhappy are often not successful in the long term. A win-win outcome for both parties is an indication of a bright future.

The Bottom Line

The number one factor for most people to consider when evaluating a job offer is if the position makes sense personally. If it passes this very important litmus test, then determine if it makes sense professionally and financially.  Clearly this article is meant to touch on a few of the high points when considering a job offer.  For a more thorough and detailed analysis, there is no substitute for professional counsel.