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How to negotiate executive compensation during a recession
Pavilion HQ | PUBLISHED ON Oct 12, 2022

How to Negotiate an Executive Compensation Package in a Recession

Landing an executive job is no easy feat. After years of hard work, your effort has finally been recognized—and it should be rewarded with the proper compensation. However, in the current business climate, cash compensation is increasingly difficult  to come by. After a flush year in 2021, venture capital firms are cooling the cash flow to tech and other companies, and salaries are shrinking to accommodate this change. Rampant hiring has been replaced by slowed growth and layoffs—and many are convinced there’s a recession waiting in the wings. 

Luckily,  cash is not the only—or even the best way—to be remunerated for a job well done. A solid executive compensation package should have the ability to weather the best and worst of financial times. The trick is to keep your compensation portfolio diverse, innovative, and aligned with the company goals and personal performance, keying your success to the success of the business and vice versa.

Below are Pavilion founder Sam Jacobs’ tips to make sure your executive compensation package pays out—now and later, regardless of economic realities.

Do Your Homework (Due Diligence)

Even if the economy shows signs of slumping, do not rush into just any old job upon receiving an offer. Instead, leverage your decision-making power and do your research prior to accepting an offer outright. Make sure you get a feel for the company culture and overall fitness before you sign on the dotted line. At the bare minimum, you deserve to know how the company might weather an economic downturn. Do not say yes before scoping out the product-market fit, as well as the size of the total available market and the serviceable available market. Beyond crunching numbers, it’s also vital to get a sense of the company’s culture and ensure it’s aligned with your goals, values, and vision. Don’t skimp on this part: Hire a lawyer to go over contracts and stipulations. Make sure the hiring team can answer all your pressing questions. If they can’t, it’s a bad sign—and time to walk.

Prioritize Alignment Over Cash (Aligned Compensation) 

Often, the way companies set up cash incentives pit the executive team against each other—or worse, jeopardize the long-term financial health of the business for short-term gains. When negotiating your executive compensation package, fight for a structure that helps executives collaborate and grow within the company. Focusing only on cash compensation and bonuses rewards a short-term mentality that can lead to financially irrational behaviors and competition, like cutting corners or majorly discounting just to get the deal done and   reap the largest bonus. It’s wiser—and more lucrative in the long run—to pick a compensation package that is keyed to company growth and linked to clear performance goals. A good compensation structure emphasizes salary over bonuses—with an 80/20 ratio being the sweet spot—and rewards executives for reaching clearly-defined, company-first goals.

Emphasizing alignment over easy cash rewards collaboration and effort, making your job easier and your work more effective at the same time.

Bank on Liquidity, Not Cash (Liquidity) 

Once you’ve done your due diligence and ensured alignment in your compensation structure, you can turn to the practical stuff. There are many ways to be remunerated outside of cash salaries and bonuses that diversify your compensation and provide stability during tough economic times. Here are a few to negotiate for in your compensation package.

  • Milestone payments: You make a deal with the company that compensates you when you reach a clear, performance-based goal—like hitting your ARR—within a certain period of time. This incentivizes hard work and rewards alignment, not to mention ensures  that you will be paid for a job well done.
  • Double trigger: A double trigger ensures that you will be paid for half your unvested equity no matter what happens, and the remaining half if you are terminated without cause. Double triggers help protect you financially while you work for a company—and if you’re let go.
  • Extended and cashless exercises: In an extended exercise agreement, you reserve the right to exercise your options for up to a year after leaving a company—as opposed to the standard 90 days—leaving you with more time to make decisions and leverage your earnings. A cashless exercise allows you to buy stock using your existing options, building wealth without cash.

 

Cover Your Bases (Severance) 

Pre-negotiating severance is one of the smartest ways you can protect yourself financially. But how much severance is reasonable? Three months is bare minimum, and executives should negotiate for at least six months. If you need to compromise, you can tier your severance payments based on your time at the company. Investing in a good lawyer upfront to review your severance agreement can save you a lot of heartache and lost paychecks down the road. 

Keep Options Open (Consulting) 

In tough economic times, it’s wise to have several streams of income. A compensation package that includes the right to monetize your non-competitive expertise through consulting or advisory work is one of the best ways to build recession-proof wealth. 

Balance Your Compensation to Ease Your Mind

The above strategies are by no means the only ways to protect and increase your wealth without relying on cash incentives. To read more about how to round out your executive compensation—including winning a great severance package and protecting your consultant privileges—read Sam ‘s Fast Company article here. And remember, that no matter the economy, it’s most important to find a good fit in a company that is willing to invest in you for the long term and to find a compensation structure that protects you in both boom times and bust.

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