It's all in the (copper-bottomed) contract

Fat cats like Dick Grasso have given big money a bad name - yet we all want more of it. Check the small print and you just might get it, advises Andrew Saunders.

by Andrew Saunders
Last Updated: 09 Oct 2013

JK Galbraith, the Canadian economist and self-styled scourge of corporate America, once noted that 'The salary of the chief executive of a large corporation is rarely a market reward for performance. It is frequently more in the way of a warm personal gesture from that individual to himself.'

That was more than 25 years ago. But despite the inclemency of the economic climate and increasingly strict rules on the disclosure of (and hence the need to justify) senior executive pay, there have been plenty of cases in more recent times where this harsh maxim still resonates.

If you take 'salary' to include the exotic cocktail of benefits, bonuses, incentives and pension contributions without which any self-respecting captain of industry will not get out of bed these days, then shareholders of many of our top companies might recognise the spirit of Galbraith's edict even today.

JP Garnier at GlaxoSmithKline and William Aldinger at HSBC both had a hard time persuading investors earlier this year that they really deserved the kind of contract package they were proposing to award themselves.

Not to mention the fringe benefits - in Garnier's case a massive pounds 22 million pay-off in the event of his unscheduled departure, plus a pension that overstated his age by three years.

Aldinger was effectively paid dollars 20 million for keeping his job, receiving that sum as a termination fee following HSBC's acquisition of his former employer, Household International. He was then reappointed to head the merged group on the same deal, which includes the now-famous 'golden teeth' lifetime dental plan for both him and his wife.

When pension values are shrinking and belts being tightened across the land, it's hardly any wonder that the boss's take-home pay becomes a subject of great interest.

But in the heat of this debate, it's easy to forget that all these deals are just that - deals. They have been negotiated and someone (or more likely a group of people) has agreed that the terms and conditions are reasonable. The stakes may be higher and the ceremony more elaborate on the very top rung of the corporate ladder, but an employee is still an employee and a job contract still a job contract. 'What's in them will differ from firm to firm, but right up to a very senior level, many companies still have a standard form of contract,' says Stefan Martin, employment partner at Allen & Overy. And what's in those contracts is the starting point for every new hire, from graduate trainee all the way up to the chairman and chief executive.

So, if the process is not divorced from the way that mere mortals a few rungs down are hired and rewarded, why are the outcomes so different?

How did Tomkins' Greg Hutchings manage to square his extravagant ways - at one time he famously had not one corporate jet on standby but a fleet of them, and both his wife and housekeeper on the company payroll - with the fact that the business was going to the dogs at the time? How did NYSE chairman Richard Grasso manage to collect dollars 140 million - a sum so large that one fellow board member thought it was a typing error - from his employer before his forced resignation in September?

Even those with a stellar record and cast-iron reputation for ruthlessness seem to develop a warm Galbraithian glow when it comes to the small print of their own terms and conditions. 'Neutron' Jack Welch, for 20 years the US corporate hero sans pareil, was so badly pilloried for the lavish retirement deal he brokered on leaving GE that in 2002, following interest from the US Securities and Exchange Commission, he started paying GE about dollars 2.5 million annually for a severely reduced version of it. The full story emerged during his divorce from Jane last year. Among the juicier perks enjoyed by Welch was use of the firm's Boeing 737 and a fully staffed apartment in New York's Central Park district, plus free food, free wine, a limo service and tickets to Boston Red Sox and New York Yankees football games (and tennis at Wimbledon) - on top of his dollars 9 million-a-year pension.

Some of this disparity is due to old-fashioned self-interest, of course.

'There's no doubt that where their own pay is concerned, boards tend to decide what they want and then justify it,' says David Somerlinck, corporate governance policy manager at Pensions Investment Research Consultants.

But the worst excesses of the '90s were also caused in part by the cult of the CEO. Feted bosses started to believe that they were the living embodiment of the company and could do what they liked - 'L'etat, c'est moi', as Louis XIV said.

This unhappy condition is a consequence of big-ticket pay and benefits, as Adrian Atkinson of corporate psychologists Human Factors International explains. 'At work, people value other people whom they don't know by the sums of money associated with them.' This eventually rubs off on the well-favoured recipient, who starts to believe his or her own press.

There are further complications to the psychology of a golden contract.

'If you start a new job on a huge salary that you get paid regardless of the company's success, you will generate correspondingly huge expectations and everyone will say you are great,' says Atkinson.

But if loads of dosh, great benefits and hero-worship into the bargain sound like the kind of problems you wouldn't mind getting to grips with, beware. Impossibly high expectations generated by such open-ended deals lead almost inevitably to crushing disappointment. 'It creates a very binary situation,' Atkinson explains. 'If you make only two or three bad calls in the first year, those same people will very quickly start to think you are rubbish.' So, as the proverb says, be careful what you wish for.

But what about the rest of us? The biggest lesson that these fables of executive excess hold for the majority who are never likely to cut multi-million pound pay deals is that you can always try to negotiate. 'The employer's opening gambit will always be 'these are our standard terms and conditions for this job, take it or leave it',' says Martin at Allen & Overy. But pay and benefits packages typically start from basic salary, with an allowance based on that sum factored in to account for a performance-related bonus pension scheme, medical cover, health insurance and company car and chauffeur, where offered. That might be 25% of salary, and provided you keep your overall deal within that range, most companies will be prepared for some horse-trading.

'Employers have a pretty good idea of what the overall deal should cost,' adds Martin, 'but if you want to trade in your company car for a boosted salary, for example, there should be room for manoeuvre.'

The starting point for any negotiation is preparation. Whether you're looking at a new employer and fresh start or a promotion with your present firm, the first thing to do is to read your contract of employment. That doesn't mean taking a quick shufty at the page marked 'benefits' or furtive perusal of the disciplinary procedures (both of which, if offered by your employer, are legally required to be set out in said document), but a thorough examination all the way from the first sentence to the final full stop. It may not be much of a page-turner, but it forms the basis of the relationship between you and your employer and really is worth the effort. Consider engaging an employment lawyer to help with this - you may find that money spent now reaps big dividends in years to come.

As with any legal document, the best time to do this is before you sign it. 'It's important for an employee to fully understand the basis of their employment before they start a new job,' says Gareth Brahams, employment and incentives partner at Lewis Silkin. 'The contract is unlikely to contain many dealbreakers, but there are some things you should be aware of, like post-termination restrictions and short notice periods.' If you're already signed up, a new job or promotion should offer the chance to strike a new and better deal.

The latitude for negotiation varies with different organisations and different jobs. It's in your own interests to sniff this kind of thing out, but there are some general rules. 'Large companies tend to be less open to negotiation than small ones, and the more senior you are, the easier it will be to do a deal,' says Brahams. The very biggest jobs tend to be the ones that stray furthest from the off-the-shelf deal, so the higher you go, the more freedom you will have.

Small victories are easier than big ones, too. Asking to change your notice terms is more likely to be well received than demanding a huge pay increase or a whopping pension top-up.

Have a fixed idea of what you want in terms of pay, benefits and pension before you start negotiating and, crucially, get your requests in first.

'If there are key terms that are important to you, make an early bid for them, before the employer has a chance to state their case. If they want you, it's much harder for them to say no at that stage,' concludes Brahams.

There can be particular circumstances that you can exploit to your own advantage. When Hutchings finally left Tomkins, the company was struggling without a pilot in the choppiest of commercial waters. Such was the board's eagerness to sign up the next boss that they offered Canadian ex-lawyer Jim Nicol a contract worth up to pounds 25 million on his appointment last year.

So do your homework and find out as much as you can about the circumstances surrounding the firm and the job you are interested in. This will this help you look good anyway, and may just reveal some priceless commercial intelligence.

As for your pay packet, you are more likely to get the OK on a better package if you're prepared to take more of it as performance-related.

But take care to examine the targets and decide whether they are achievable - don't let the cash blind you to what you've got to do to earn it.

'I know people who have taken jobs because of the money, even though they have had doubts about whether they could do it,' warns Atkinson.

Thus armed, you should be in a much stronger position to cut the best deal you can. You probably won't - and indeed shouldn't - try to scale Galbraithian heights, but remember the golden rule: if you don't ask, you don't get.

(THE SMALL PRINT)

WHAT TO LOOK OUT FOR IN YOUR JOB CONTRACT

JOB TITLE/DESCRIPTION: A job title is a legal requirement, so make sure it's there and it matches your expectations. Beware very loose and flexible job descriptions. Phrases like 'and other duties as required by the company' give your employer the option to change your job as they wish, regardless of what you want from it.

PROBATIONARY PERIODS: Typically, these specify that you need be given only one week's notice of termination during the first three to six months at a new job. They are used by employers to limit their liability on 'risky' hires - first-jobbers or people with little or no experience - and should be given a wide berth by anyone else. If you're coming from a good job with a solid track record, don't let yourself be tied to a probationary period.

NOTICE PERIODS: Take as much notice as you can get. For the first year of your new job, your notice period is the best chance of getting some money out of your employer if things were to go wrong. If you are worried that a long notice period will harm your chances when the time comes to move on again, ask for asymmetric terms - they have to give you six months' notice but you have to give them only three months, for example.

RESTRICTIVE COVENANTS: These place restrictions on you for a certain period (six to 12 months, typically) after you leave a job. There are four basic kinds:

Non-solicitation - You may not approach past clients for business in your own right or that of your new employer.

Non-dealing - As above, except that you must also refuse past clients if they approach you.

Non-poaching - You may not offer staff from your old employer jobs with your new one.

Non-competition - You are not allowed to work for a competitive firm for the specified period.

The first three are accepted practice in service businesses that rely heavily on client relationships. But be wary of an employer that tries to impose a non-competition covenant - it may not be legally enforceable, but if followed it almost inevitably means that you will be spending months out of a job.

HOLIDAYS: Your annual leave should be quoted exclusive of public holidays, or else that 25-day quota might amount to a paltry 17 days.

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