Frequently Asked Questions About CEO Compensation, Equity Packages and Negotiations

As a CEO or C-level executive, you face critical decisions that can shape your financial futures and careers. Concerns like “Am I being paid fairly?”, “How can I safeguard my compensation if the company’s plans change?”, or “What protections do I need to secure my long-term interests?” are common. In my 20+ years as an executive employment attorney, I have counseled many CEOs, C-suite and senior executives across various industries, addressing the unique challenges and concerns regarding their employment, and providing insights and strategies to optimize their compensation. In this work, my goal is always to ensure that my client receives fair CEO compensation that recognizes and rewards the enormous value he or she brings to the company and its shareholders.

I have written extensively about CEO and C-level executive compensation packages and negotiations.  Below are answers to some frequently asked questions I encounter in my work in this field.

• Should I ask for a signing bonus?  When is a signing bonus most appropriate? 
  Yes, you should consider asking for a signing bonus, for two important reasons.  These reasons also speak to when it is most appropriate for you to ask and press for a signing bonus. First is a “make-whole” signing bonus.  You need this when a new employer wants you now, and you are being asked to leave behind unvested equity, unpaid bonuses, or other benefits tied to your current role. That signing bonus can compensate for your losses.  Second, is a “movement” signing bonus.  Where you are recruited and asked to leave a stable and rising position, this signing bonus is to mitigate the risks of transitioning to a new position, such as uncertainty in company culture or performance.
• How should I handle it when the recruiter asks me – what are you making now? 
  In a word:  carefully.   This is especially true, when you are grossly underpaid now and seek a significant bump up in your next job.  For example, you took the CEO job despite a low salary because it was a big boost to your career. Now, established you want to cash in on your next move.

  So, to answer carefully, you can respond, “I am really underpaid right now, so my current salary is not relevant. The relevant question is – what salary would it take to get me to consider a move.  To answer that, if your client company cannot offer me at least $xxxx base salary, we need not go further.  I’m not saying I would make the move at that salary but at least we are in the ballpark to discuss a move.”

  Some states and jurisdictions have laws prohibiting employers from asking about current or past compensation.  However, my suggested deflection answer is the preferred approach rather than “getting legal” that could be a big turn off to a potential employer.

• What is the right amount of CEO equity to negotiate for?
  Two words here:  Meaningful Equity.  You want the amount of CEO equity that moves the needle for you.  For example, if your total take home gross pay is $400k with no equity in a comfortable senior position, it is not meaningful to move to a comparable cash and $250k equity opportunity.  $1 million in equity is more like it. $2 million? That’s certainly meaningful.

  You want to look at current equity value and what kind of growth is needed to reach the right level.  Thus, in this example, if your total strike price is $100k, it would take 11x growth to reach that $1 million goal.  But if your aggregate strike price is $500k, then it’s much closer to a meaningful 3x growth that nets you $1 million.

• Is there anything I can do to structure the CEO equity to reduce my tax hit? 
  Yes, selecting the right equity structure can reduce your tax hit.  In tax law, form is substance.  So, you want to select the right form in your circumstance to deliver the best tax outcome.  Here are three examples –

  – Stock options can be good and bad. They can be good because there is generally no taxation until you exercise the option. They can be bad because your exercise often triggers ordinary taxation.  The worst is when those big taxes are triggered and the stock is not traded, so you are taxed without cash proceeds from a stock sale.
  – Restricted stock can offer the greatest tax advantages.  If held longer than a year, the gain is taxed at lower capital gains rates.  If the shares are qualified small businesses stock and held for five years, the gain may even be tax free.
  – LLC profits interests also offer the advantage of capital gains rates on the appreciation.

• Is there anything I can do to protect myself if the company has a history of high turnovers or if I lose my champion or the company otherwise decides they want to “go in new direction” and I am terminated after a year or so? 
  Normally, employment is “at will”.  So, unless you can threaten suit for wrongful termination, you are powerless under these circumstances.

  Despite that handicap, there is indeed something you can do to protect yourself. It is important to negotiate severance terms if you are fired without cause or if you quit for good reason.  There are different items such as severance, bonus and equity acceleration you can include.  This way, if you have robust severance benefits for termination, it serves as deterrence.  And if the company still wants to terminate you, these robust terms will force it to buy you out.

• Should I bring in an executive compensation attorney?  Is it worth the money?  Will he or she queer my deal? 
  Yes and no.  If you bring in an attorney who normally represents employers as most do, or an attorney not well versed in taxation or the key CEO contract terms, the attorney might not determine the changes needed that are important to you or know what to ask for.  In that case, the attorney might not add sufficient value to justify the cost.

  However, if you hire a specialist attorney in executive employment whose main focus is on executives and who has the right experience and knowledge, and you have some leverage to get changes to your package, he or she will be able to tell you what is missing and needed, including different tax structures, employment, severance and equity terms. That sort of advice is well worth the cost to you.

An experienced executive employment attorney is adept at maintaining a collaborative tone with employers while advocating firmly for your interests. He or she will be able to advise you and not interpose himself or herself to queer your deal. The right attorney will seek reasonable terms to make you look as good as possible.  He or she can expedite negotiations by ensuring both sides clearly understand and agree to terms.

If you pick your attorney carefully to negotiate your CEO compensation and equity package, it can be a wise investment.  Ultimately, hiring the right executive compensation attorney can provide peace of mind, protect your interests, and position you for long-term success. If you’re navigating a career-defining opportunity, this kind of guidance can be invaluable.

Written by Robert A. Adelson, Esq.
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