HOW TO HIRE YOUR HEAD HONCHO
Both sides should take the long-term view because this is more than a transaction
Negotiating and finalising the compensation of a Chief Executive Officer is probably the most interesting task, yet it is probably also the most challenging one too.
For all stakeholders – the company, the search firm, and the candidate – to converge and reach agreement is perhaps the most complicated and least publicised process in any company’s functioning.
Over the last decade, even in India, the CEO compensation design is slowly converging to global (Western) practices. For listed and (or) board managed companies, a nomination and remuneration committee is asked to drive the process.
As the search consultant executing a given mandate, Hunt Partners, in most cases, drives the structuring of an offer, followed by handling negotiations with shortlisted candidates.
We routinely advise clients to avoid direct negotiations with candidates. In our opinion, it works out better for both sides to have us playing intermediary. Why? These processes go through ups and downs, and can often become tense. With us serving as an intermediary, communication channels remain open. For instance, there was a case where a client – who handled their own negotiations – walked away assuming (wrongly) that the candidate’s expectations bordered on the edge of greedy. The client walked away. No one won.
Now it is even more complex. The design of the compensation has become an art form, with specialist firms invited in, to help with the process. Layers of added complexity come in, in the form of time-tailored incentives – short, medium, and long term.
Just understanding the structure takes time. In our process today, we always block some time with shortlisted candidates to walk them through each element of the compensation plan.
Just recently, when we handled a growth venture set to launch an IPO in a few years the compensation offer had every possible component one could think of, and more. There were fixed salary components, variables, stock options of the employer and its holding company.
Unless one is able to authoritatively explain every element to candidates, arriving at a mutually acceptable final figure becomes difficult. Candidates and would be employers are already on tenterhooks about what figure the person walks away with at tenure end. Add to that a clawback clause (that is becoming the rage now), and an altogether new wasps’ nest is disturbed.
Such negotiations can be extremely stressful for both sides. Candidates generally have very little experience with such negotiations and understandably, both sides are suspicious of the other. Balancing cheerful demeanour with focussed thought and the need for both sides to not be overly greedy is the key to a win-win out outcome.
I always recommend strongly to all candidates that while it is absolutely fine to negotiate – as indeed they must – being realistic is more important. “Don’t be stubborn as you may end up killing a deal that might yield more in the longer-run if you are willing to take some risk,” we tell them.
Many times, we’ve have seen negotiations break down just as a deal is being finalised, because both sides are stuck on one single point or issue.
BESIDES THE CASH COMPONENT, THERE IS SIGNIFICANT VALUE IN ITEMS SUCH AS COMPENSATION FOR RELOCATION, MEDICAL PLANS, RETIREMENT PLANS, ETC
Almost inevitably, this will come down to a matter of emotion or ego. That is the point at which we step in and say, “If you sense this is the case, find another place to make up for it; or just let the matter slide”. By this point in the negotiations, the sensitivities involved are so high that it is very easy for both parties to miss the larger picture and lose the deal.
For candidates it is extremely important to consider all the individual components of the entire package. Besides the obvious concern over the salary’s cash components, there is significant value in other items such as compensation for relocation, medical plans, retirement plans, termination agreements, and the like.
A key strategy is for each side to identify exactly what they think is critical and what is merely desirable. We advise both sides to take the long-term view when negotiating because this is more than a transaction. After this process is completed, both sides need to work together for the company to grow and that is something neither can afford to forget.
Another thing we always ensure is that all existing compensation related details and documents are made known upfront. Last minute surprises or additional requests after a negotiation is concluded are a complete no, no!
There are also some interesting compensation options emerging these days – either as demands from the candidate, or as offers by employers. Some that we saw recently were: VIP seats for events, company car for personal use of the family, interest free loans, home security, and management training at Ivy League universities.
In one case, the company bought an apartment for the CEO that he could then purchase whenever he wanted from them. But each year that he stayed with the firm earned him a 10 per cent discount on the price of the house.
Once the terms have been agreed to, the deal needs to be captured in its entire essence. What was formerly, a two-to-three-page document now runs into 30 pages or even more, of employment contract, covering the employment terms, compensation, stock options and code of conduct. Included also are clauses on information security, confidentiality and intellectual property rights. In many cases we see specific scenarios being woven into the contract that could be unique (for instance potential conflict), and how these should be treated. In fact, now it is routine rather than unusual for a CEO to seek legal advice while negotiating a contract.