do I begin negotiating for deferred compensation?
I have been an hourly consultant my entire career, and have been
recently approached to take a permanent position with one of my
part-time clients. We have successfully negotiated and agreed upon
vacation, healthcare, training reimbursement, and similar benefits
(including ISO stock), but we are still significantly far apart
am asking for considerably more than the company is willing to pay,
even though my salary expectations are more than commensurate with
the industry and my skill set for this nearly executive position.
company says their reasoning is that they are cash-flow sensitive.
After examining their financial statements, I see what they mean,
but am even more interested in joining this organization due to
their growth potential.
this end, I would like to discuss some form of deferred compensation
package. I don't believe they will agree to a deferred salary plan
due to their cash-flow. But I am don't know what options exist,
what's legal and what (besides profit-sharing) could be tailored
to my agreement without affecting the company's standing with other
employees. I have researched lump-sum compensation in the event
the company is sold, deferred bonuses, and equity-based signing
there other choices, and where do I begin?
I can appreciate why the company is reluctant to increase its operating
costs by increasing your base pay. And I like your idea of putting
in place a deferred compensation program.
you are nearly an executive, you can create a nonqualified deferred
compensation plan. If the company doesn't have one, they can
make an exception for you. And because you are the exception, you
have four variables to play with: the length of the deferral, the
interest rate applied to amounts deferred, the amount of compensation
deferred, and the pay mix or combination of cash and noncash forms
of compensation that are ultimately paid.
you can determine the length of the deferral. Is it a few months,
a year, or every year? Does the deferral end when the company reaches
certain milestones - venture capital infusions, positive cash flow,
performance standards? Does the deferral end when you leave the
company? And does the end of the deferral - that is, the day they
start paying you your full base salary - coincide with when you
are paid back the amount that has been deferred, or does more time
elapse before you are given what is owed?
what interest rate will apply to the amount deferred? It can be
zero, or it can be at or above market interest rates for corporate
how much are you deferring? Negotiate for fair market value, and
defer the difference between what the company agrees you are worth
and what they are able to pay today.
what form will the deferral take? You could take it in cash, stock
options, or grants of stock.
don't owe income tax on the deferred amount until you are paid.
you defer, the money deferred is not guaranteed and is just as much
at risk as the rest of the business. You are taking a risk by working
with a company at this stage. Nothing can protect you from the company
going bankrupt before it has been able to pay you the rest of your
compensation. However, there is an instrument called a "rabbi
trust" that can be established to protect nonqualified deferred
compensation plans in the event of change of control such as acquisition
or change in the composition of the board. Ask your financial planner
you believe in the company, I might however suggest you design a
long-term incentive program that will tie your performance with
the company's performance over the next 24 months. You can ask for
additional stock options or ask for a cash award based on a set
of performance criteria to which you and your boss agree.
compensation program that simply defers a portion of your salary
may not be as rewarding if you tie it strictly to performance. I
would suggest listing three objectives you expect to accomplish
over the next 24 months, and ask for a mix of cash and stock if
you meet or exceed those objectives.
Erisa Ojimba, Certified Compensation Consultant