The four traps when negotiating remuneration with senior executives.
1: Promises the company can’t keep
The person or people charged with recruiting for and/or negotiating executive employment arrangements on behalf of a company, whether they are a recruitment agent, the board, a director or group of directors, the Chief Executive Officer or another senior executive, should know and understand the parameters of the remuneration terms they are charged with negotiating and not go beyond these, in particular:
- The term of the appointment, whether it is for a fixed term, a maximum term or an ongoing term;
- Remuneration elements and quantums, specifically, any sign-on or retention benefit, base salary, superannuation, bonus or short term incentive (including rules), any long term incentive (including relevant plan rules) and other benefits such as electronic devices, parking and insurances (and how they are valued); and
- Termination entitlements (see further point 4 below).
If the recruiter or negotiator is misinformed or ill-informed about any key aspect of the arrangement the company may still be stuck with a contract that is negotiated on the basis of the incorrect information.
2: Keeping the new boss sweet
To avoid real and perceived conflicts of interest best practice is to exclude executives from any discussions and decisions that concern their individual remuneration. Further, care should be taken to avoid direct reports to executives being involved in the setting of their boss’ pay.
For companies listed on the Australian Securities Exchange there are detailed recommendations and requirements relating to the appointment and remuneration of executives that should also be considered.
3: Uncapped ‘at risk’ pay and other potential disasters
In setting executive remuneration it may be challenging to strike the right balance between being able to attract talent, appropriate incentivation and long term business strategy. Some general ‘rules of thumb’ that may be considered include:
- Do not offer specific incentives for which no scheme is yet in place because when the scheme is established the terms may not be able to be met, leaving the company exposed to a claim by the executive regarding the unrealised benefit;
- Do not offer incentives that encourage excessive risk-taking;
- Match short and long term business objectives with hurdles for short and long term incentives, as appropriate;
- Cap pay levels; and
- Undertake scenario testing of incentives to avoid perverse results.
4: Avoidance of the ‘divorce’ discussion
An employment relationship might be considered a little like a marriage and when an employment relationship ends the divorce can be ugly!
The best way to minimise the ugliness is to work through the various circumstances of termination i.e. good leaver (for example, the executive retires or their role is made redundant) or bad leaver (the executive moves to a competitor or their employment is terminated due to their inadequate performance or misconduct), define these circumstances specifically and then agree what the executive will receive in terms of pay, and their obligations, in each of the circumstances of termination.
In undertaking this process regard must also be afforded to the regulation of termination benefits in Australia which can be complicated and is different to the position in other countries.
If these issues are dealt with in the written terms of employment at the commencement of the relationship the process for cessation of the employment will usually run with as little disruption as possible.