What if employee candidates ask for the moon?
In 1981, Herb Cohen wrote and published “You Can Negotiate Anything”, an excellent
guide to great negotiating. I’ve read and reread the book a number of times and find myself using the techniques often in many areas of my life. One of his lessons remains clearly on my mind and is a variant of the old “You name the price and I’ll name the terms” challenge that works so well in negotiation.
Here’s an example we’ve heard before:
Cohen sets up an example where a senior position job candidate is stuck on a salary twice as high as the CEO is willing to pay, leading to a standoff between the two. Cohen goes on to point to twenty-five non-cash items that the CEO could have used to narrow and eliminate the gap, many of them untaxed perks worth more than face value because of the employee’s tax savings. They include an expense account, company car, profit sharing, 401k contributions, medical coverage for dependents, free life insurance, educational payments, extra vacation, relocation expenses, paid trips to industry association meetings, or a small override on revenue from new products developed under the candidate’s watch.
…and stock options as a perk?
[Email readers, continue here…] One of the items on Cohen’s list of twenty-five was 
stock options. That of course jumps to the top of the list for young, fast-growing technology companies. Many skilled, experienced executives have jumped from mature companies to more risky positions in smaller, fast-growing enterprises primarily for the options. In a previous insight, we explored the common percentage of a company’s fully diluted stock that is often granted in the form of options for new employees.
Then again, there are those seductive unicorn opportunities.
Many an executive has made much more than any cash compensation from exercise of “in the money” options after taking the leap to a smaller, fast-growing company, attracted by just this form of incentive compensation. When used in combination with several of the twenty-five additional non-cash forms suggested by Cohen, salary alone does not seem to be the barrier most people believe it to be.
items were completely achieved in one year. Upon reflection, he stated that revenues could double the following year, and that the company’s reputation among larger customers would be so greatly enhanced that the company could become the leader in its niche. My obvious retort: “Then why not offer this candidate the moon if he can achieve this?” The offer was sent and the CEO was much happier, dreaming of the possibilities, not the incremental cost.
It is amazing how few company CEOs grasp the concept that executives and managers should be compensated not just for doing their named job, but for exceeding expectations while advancing the corporate goals. To align everyone in the organization in exactly the same direction is a task, one that is a powerful driver for growth. People should be compensated well for such outstanding contributions.
How to give away too much too soon:
specifically calls for an appraisal of the value of the corporation’s stock current to within a year of any grants of options, although there is an exclusion for early-stage businesses in which expert members of the organization or board may make such an appraisal if they qualify according to the exemption. But after the enactment of the Dodd-Frank legislation over a decade ago, there are few if any insiders willing to step forward to provide this expert service from within.
Options typically are earned over time, which we call vesting. If a grant of 10,000 shares is made on January First, typically there is a four-year vesting period in which the employee earns the right to exercise (buy) 1/48th of the shares each month. Many plans also call for a one year “cliff” in which an employee who is separated from the company before a year is unable to exercise even the shares which would have been vested at that point.
handled respectfully during the separation process) and most managers will agree that the move should have been made sooner. The former employee will often state that they were at least somewhat unhappy in the job, knowing that the fit was not as good as it should be. The manager will most often admit that they did not move aggressively, following best judgment in coaching the employee toward separation much earlier.
the hiring process that continues through the life of an employee’s tenure with the company. Bradford Smart captured this succinctly in his book, Topgrading. His thesis is that “A” players amount only to the top ten percent of the talent pool at any given time, and that your job is to find, recruit and retain only “A” players to make a successful business.
A successful hire is not just the responsibility of the recruiter and manager to whom the recruit will report. Many companies require that finalist candidates be interviewed by company contemporaries, good employees who fill similar level positions. Some even encourage interviews with those the candidate would manage. Agreement among the interviewers becomes an empowering experience for those conducting the interviews and agreeing to the decision to hire and paves the way for a quicker assimilation of the new employee into the organization whose cohorts are already prepared to receive and encourage the new hire.
over the years – that this stage typically occurs first at about twenty employees or $3 million in net revenues (or gross profit) for most any kind of company. In future weeks, we will dissect this $3 million-dollar phenomenon separately.
On a Friday evening, I got into my car and drove from my office in the Los Angeles area all the way from Los Angeles to Ensenada, Mexico, checking into a remote beach hotel. After arrival and checking in at the hotel on the beach, I found a large rock at the shoreline, climbed it, and sat there for hours contemplating my future. Hire for growth, or grow slowly and comfortably?
business was young, and I was a software developer building a young company based upon quality first. Asked to speak at software industry events, I found my voice and immediate audience understanding as I described variants of these problems to my audience. The insight became clearer as I was hired again and again to pick up the pieces of failed programming efforts by other software companies in this then young industry.
The same story could be constructed for any company selecting a limited number of test customers for a new product. Select too many, and pay too little attention to each. Commit all your core resources to solving the resulting problem, and new work stops. Time bankruptcy. Not a pretty sight, and completely avoidable.
cause simple problems, you are right.
It becomes obvious then that there must be a balance somewhere between rushed release and too much rigor in pre-release planning and testing. Perhaps that balance can be measured in estimating what a company could endure in lost overhead and hits to reputation before becoming crippled and unable to recover. With that measure based upon pure estimates, the balance point changes between companies, with the largest, most profitable companies able to suffer the most risk as to resources, and the smallest suffering by far the most when measuring reputation.
and money that is more complex than most managers think. Fixed overhead for salaries, rent, equipment leases and more make up the majority of the “burn rate” (monthly expenses) for most companies. Since this number is budgeted and pre-authorized, managers tend to focus upon other things such as sales, marketing and product development issues.
The financial pain of unplanned delays.
add new money to the company for the project. Not long after, the company was sold in a “fire sale” amounting to slightly less than the debt on the books. All investors, including the VC firm, lost everything. Do you remember a previous insight, that “the last money in has the first say”? That is what happened within the dynamic of the board, and the result is that the board was completely at the mercy of the “last money” VC to save the company in the end. Yes, there were other issues such as a protracted patent rights fight that drained cash, but the largest problem, inefficient use of R&D time burning fixed overhead, led to the demise of the company. Lots of good jobs were lost and many investors including me were left with the question. “Why did the company abandon a profitable market, even if it could not generate $100 million a year in revenues?”
