Use No Less Favorable When At Impasse in Your Office Negotiations
ACTUAL CASE HISTORY: In 1995, Petra joined a small St. Louis-based software development company as its 10th employee. She was hired to assist one of the three partners in his dealings with prospective customers. Over the next seven years, Petra worked hard, and grew in responsibility as the company grew in revenues. Seven years later, in 2002, there were 185 employees, with offices in four cities. While rising to the position of Senior Vice President of Business Development, Petra had helped build the customer base from 38 to 174. Unfortunately, her compensation hadn't grown nearly as much.
Petra experienced first-hand what few people realize: rapidly growing companies struggle increasingly to pay bills, to balance cashflow, and to maintain sufficient working capital. As is common in growing companies, cashflow always seemed tight. Every equipment purchase, every marketing campaign, and every new office seemed to devour available company resources. For Petra, this meant her raises had been minimal, her bonuses had been negligible, and her benefits remained limited. Petra's boss knew her value, and prized her contributions, but felt he couldn't afford to do much better. When Petra asked that her compensation be raised to what she thought was "market" for her skills, her boss shrugged, and said, "maybe next year," or "possibly, if we go public." Petra even asked about the possibility of "becoming a partner," but was told, "We're not ready to do anything like that."
In January, 2002, just before Petra's scheduled annual performance review, she consulted us. She didn't want to leave the company; in many ways it was like her "home." At the same time, she felt she wasn't earning enough for her family, her retirement, and her kids' education. And given the poor state of the economy in 2002, there didn't seem to be many jobs available in software sales. One suggestion we made was that in her negotiations she request "no less favorable" treatment. In other words, if the company ever decided it could provide its executives compensation, benefits and equity at a level closer to "market," then Petra, too, would be entitled to that same - or better - treatment. In international trade and diplomacy, this is sometimes referred to as "most favored nation" status.
At her annual review, Petra raised the issue with her boss. "You know, Jim, if and when the company finally does have the revenues to give market-rate compensation and benefits, I'd like to know that I'll be first in line." "Sure," he responded, "Isn't that what I've always told you?... when we have the money." In fact, that was exactly what he'd told her for years. In his memo to HR confirming Petra's two percent raise, Petra had her boss insert a notation that "Petra has expressed disappointment with her raise this year, and in prior years. When the company elevates its executive compensation in the future, Petra should be treated no less favorably than other executives at her level." It wasn't money in her pocket, but it was potential advantage, which is better than no advantage at all.
Over the next two years, the company started to hire more seasoned executives, apparently to prepare itself to "go public." First came a Chief Financial Officer, then a Chief Operating Officer. In turn, they brought on board trusted lieutenants they knew from other companies. And to do so, promises had to be made of market-level compensation. One decision reached was to distribute stock options to senior executives to provide greater incentives. In late 2004, the "unexpected" took place: Petra's company agreed to a buyout by a larger, rival company. Everyone was excited, and nervous, too, wondering, "What does this mean for me?" It meant a lot: layoffs and severance packages for some, retention bonuses (bonuses to be paid six, twelve or twenty-four months later, provided you stayed on during the transition) and stock options for others. Unfortunately, the acquiring company had its own SVP - New Business Development, and so Petra was laid off.
Petra did, though, have two importa