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Where do I begin negotiating for deferred compensation?

PhotonicsPays
Jan 2007

Q. 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 on salary.

I am 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.

The 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.

To 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 bonuses.

Are there other choices, and where do I begin?

A. 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.

Since 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.

First, 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?

Second, 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 financial instruments.

Third, 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.

Fourth, what form will the deferral take? You could take it in cash, stock options, or grants of stock.

You don't owe income tax on the deferred amount until you are paid.

Whatever 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 for details.

Since 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.

A deferred 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.

Good luck.

- Erisa Ojimba, Certified Compensation Consultantsalary_logo.gif



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