Dissecting Compensation - A Primer on Understanding, Negotiating and Managing Pay

0:00The CMO Confidential Podcast is a proud member of the I Hear Everything Podcast Network. Looking to launch or scale your podcast? I Hear Everything delivers podcast production, growth, and monetization solutions that transform your words into profit. Ready to give your brand a voice? Then visit IHearEverything.com. Welcome to CMO Confidential, the podcast that takes you inside the drama, decisions, and choices that go with being the head of marketing. Hosted by five-time CMO Mike Linton. Welcome, marketers, advertisers, and those who love them to Chief Marketing Officer Confidential. CMO Confidential is a show that takes you inside the drama, the decisions, and the politics that go with being the head of marketing at any company in what is one of the most scrutinized jobs in the executive suite.

0:54I'm Mike Linton, the former Chief Marketing Officer of Best Buy, eBay, Farmers Insurance, and Ancestry.com. Here today with my guest, Richard Sanderson. Today's topic, Dissecting Compensation, a primer on understanding, negotiating, and managing pay. Now, Richard began his career at Russell Reynolds and Booze and Company, and he moved on to Spencer Stewart, where he leads the marketing, communications, and sales practice. He leads approximately 25 searches a year for CMOs, CROs, CCOs, and sales leadership position. Now, this is his fourth time on the show in our three-year run, and we consider him a CMO Confidential OG.

1:40Full disclosure, we've known each other for quite a while. Richard recruited me to the Allworth Financial Board. Welcome back, Richard. Thank you, Mike. Fourth time is a pleasure. Does that mean I'm getting a cut of some of the advertising revenue soon? As soon as we get some, yeah. We're going to send you a hypothetical jacket that you can wear conceptually. So, hey, let's just start about, you know, why we want to talk about compensation is it's a topic that everyone thinks about. It consumes a lot of discussion and backroom thinking, but it's not often discussed in the open. And so, you know, it'd be great to break it into sections, the basic elements, negotiating comp and then managing comp.

2:27And I thought we'd start with the building block salary bonus and equity. Give us just a takedown on that. Okay. Well, first of all, Mike, you're right. This is a fascinating topic. It's actually a bit of a mysterious topic because certainly at the marketing leadership level, the reality is there is very little public information out there. And not only that, as we all know, compensation is, you know, it's a topic which you don't talk about in polite company. so it is a it is a somewhat mysterious area shrouded in mystery and yet it's it's all we want to know about and we all want to talk about and we all want to make sure we're doing the best we can and I'll just tell you how little public information there is out there I mean for example we have looked at the proxy statements of the largest 1000 fortune 1000 companies so that's the largest companies by the revenue or market cap.

3:22And as folks may know, if you look at the proxy statement, they are required to list named executive officers, which is typically the five highest paid officers in the company. Of 1 ,000 proxy statements, Mike, for 2024, we can only find references to marketing leaders at 41 of those. Wow. So approximately only 4 % of companies have a marketing officer as one of their top five compensated employees. And even then, when we do look at those titles, the role is often broader than pure marketing. Yeah, that's where you're getting your super CMOs, right? Exactly. These may be the CMO pluses, the CMO plus pluses, call them what you like.

4:07Chief revenue, chief commercial, chief growth. there are a handful of what I call pure CMOs in there, but the sample size is really small. And hence it adds a little bit to the, am I being paid at market? Is it fair? Am I getting the best deal? Can I do better? It all adds to the difficulty of this conversation. Especially when you throw in the equity component, which can skew a year or two years versus a true pay plan. Yeah, correct. Because you got salary bonus and then equity. So kind of just take us through those three things and then we'll jump into equity. Yeah. So let's start with salary.

4:49That's obviously the piece that everyone knows. I would say base salary is the number that when we are negotiating compensation, this is the number that most people focus on. I think your base salary is a bit of a psychological anchor for everyone. I think to some extent, it's a reflection of where you are in your career and your recognition. I think to make a move, most people are expecting their base salary to increase. To me, it's the most visible and emotionally resonant part of the package. And the base salary number itself is nearly always open to negotiation when you change roles. What I would say to people is be aware of either company or industry norms around base salaries.

5:33For example, financial services firms may offer low base salaries but higher bonuses. And many large companies have essentially what they call salary grades or salary bands. So at a certain level of seniority, there is a window. It may be small, it may be large, but there is a limit that puts a range on salary. Bonus. Your bonuses are most commonly expressed as a percent of base salary. There'll often be conditions in there. It's tied to either company performance, business unit performance, individual performance, some blend of all of the above. I find when negotiating offers, actually bonuses is actually probably the hardest bit to negotiate on because they are set percentages of base salaries.

6:20And that percentage is often reflective of the level or the band or the range of the role that we were going into. I think the key question to ask about bonuses is what has been the bonus payout history over the last three years? So where has the bonus paid relative to target above target, at target or below target? And I think that reveals whether the targets are realistic and also a little bit about recent company performance. The final big area, and you hinted at this, Mike, it's equity. This is complex. The devil is in the detail, as they say, and there's a lot of detail here. Long-term incentives, equity really are a major part, particularly of CMO pay, particularly in public companies.

7:08There are lots of different types. Hey, before we go into different types, I just want to get your advice for our listeners on this. Why base salary is often the most emotional, really, where you end up making usually a lot of money is in the equity piece. Maybe sometimes you get a big kicker in the bonus, but it's really equity. And when you're younger, maybe you're not paying that much attention to equity and you're more fixated on base salary. Is that true or not? Partially. So we'll come back to equity in a second because we were talking about equity, sorry, a salary or competition components.

7:50Where you're getting to, Mike, is a slightly different point, which is compensation mix. Yeah, okay. Now, this is an important point, too. So this is a balance of what's short-term compensation is basically referring to base and bonus. Long-term reflects equity. Now, the mix depends on a whole bunch of issues. So let me give you some example. ownership if a company is public versus private or private equity or even non-profits non-profits some private you know family held companies for example simply may not issue equity in the form of a private equity portfolio company there's all sorts of conditions attached to that and we may come back to that in a moment the more traditionally understood is this component this sense of either restricted stock units, options, equity.

8:40Now, the mixed bit is important, Mike, because there are some stylistic differences, not only around ownership structure, but I'll give you another example, geographic differences. In my experience, American-based companies do lean much more heavily into equity as a part of the compensation mix. Companies based out of Europe, on the other hand, actually do not. I typically will see if we're negotiating an offer with a client for a European headquartered business, typically equity is actually a smaller part of the total compensation package. So there are all sorts of stylistic ownership and other structural issues that impact that mix that you're talking about short term versus long term.

9:26So give us the little primer on the various types of equity. Yeah. Okay. So look at it at its highest level, the two most common forms were what we call RSUs, restricted stock units and options. Restricted stock units are essentially straightforward issuance of equity at the market price. You can sit there and work it out. People have their online portals they can go into and it directly correlates with the rise or fall in share price. And the way an RSU would work, just to make sure everyone gets it right, is you get a bunch of stock, it's at$10 a share, you get 100 shares that vest at X time.

10:06If it's at$10, that's what you get. If it's at$12, that's what you get. And if it's at$1, you get the same number of shares, right? Correct. So they have value essentially no matter where the share price is, as long as the share price is not at zero. Right. Value associated with them. There's a whole talk about vesting cycles. We can, you know, we can come back to that in a second. The next variant is options. So options have something called a strike price. So you'll hear people talk about, am I in the money or not? valuing options is a lot more complicated there's various mathematical models black shoals being you know the most commonly attributed one it's complex i would say options are essentially a little bit more risky if they go up there's substantial increase in value if they go below the strike price there's no value whatsoever and you're on what's referred as being underwater and that's where we go back to our example if you get the options at ten dollars you don't make any money unless the stock goes up.

11:05And if the stock goes down to$9 versus 10, you're$1 underwater. Yeah, right. And more recently, I've seen now a significant part of equity compensation is what's called performance share units, so PSUs. Now, these are essentially, in my opinion, a juiced up variant of restricted stock units. They're essentially issued conditionally, and it will often be associated with the company meeting various strategic targets, various KPIs or metrics. And performance share units can have accelerators or even decelerators on them based on where the company is meeting those particular targets. The most common example I've seen is that they'll tell you, look, here's the value, and they can increase 0 % to 200 % based on whether we're going to hit some of these key metrics that are defined in the market.

11:59And those metrics examples might be either sales targets or total shareholder return. Correct. It's defined by the board of directors. It's trying to align the entire company and the team around various targets. It can be sales targets, can be profitability targets, can be earnings per share targets. I mean, there's almost an infinite array of metrics against which you can set these performance share units. Yeah, I ran two comp committees and public boards, and there is an infinite amount of arguing that could go with this infinite amount of metrics as well. Right. So that's the that's the types of equity.

12:39Then there's OK. So when can you actually realize them? When can you take them off the table? And so this is obviously vesting. Fundamentally, there's two types of vesting. By far, the most common is time based vesting. So literally, you are running out the clock. The most common form used to be what was referred to as a cliff vest at three years. So in other words, at three years from issuance, you could essentially sell them. and to make sure everyone knows what you mean by vesting that is when you get a chance to buy it yeah well when you get a chance it becomes yours correct it becomes more than just a number on an online portal that says what it could be worth to a point where you could actually sell it yes if you want to do it before then it's all paper it's all paper money yes thank you um it has some value but you cannot monetize it until you get to the vesting and if you leave before you vest often you're forfeiting everything right often that's also a negotiation i'm sure it's probably one of the points we'll we'll come to um i would say we're seeing lots of variance on time time based equity the three-year cliff vest was very typical certainly i'd say you know west coast or more technology companies have moved to an accelerated schedule there's often now a cliff at one year and now in some cases even monthly vesting you know 124th or 136th for example or even 148th each month now uh now that helps with with with cash flow but just to say that three year cliff vest that used to be very typical even that now um has has iterated quite substantially over different types of of time vesting for any public company by the way i mean this is all stated in the proxy statement.

14:20What you can't really do is individually negotiate what your vesting cycle is going to be. I mean, there is a program that is a structure. You cannot negotiate it. You're either in or you're out. And so I don't want people thinking they can start individually negotiating components like that. It's not. I think we're simply identifying that there are many different types of equity, vesting cycles of equity, and how they exist, and valuation models as well. And then, so there's time and then there's performance, which performance equity or performance issues, which is, yeah, we kind of talked about them.

14:55And there's one more, there can be event-based vesting. I mean, this can be linked, for example, to an IPO, a sale of a company. So if a company comes in and buys your company, I mean, they're essentially buying up all the equity on the spot. So that's an example of more an event-based trigger as opposed to a time-based trigger. So we're going to talk about negotiating now because you've got to figure out this is super complicated when you really get, particularly when you get into the equity portion we just talked about. How do you recommend candidates think through comp? Usually even before they're looking at gigs and how they get paid, but give us advice for how to think about this.

15:47So I think there's at least three or four subtopics here, Mike. I'll just lay them on the table and you can decide which ones you want to go through here. I think first of all, and I'm now really in the mode, sort of in the executive recruiter mode, which is what I'm in, which is how and when do you negotiate compensation? And I'm specifically in the situation of when you may be considering changing roles or changing companies. So topic number one to discuss would be when is the right time to discuss compensation? Topic number two that I encourage people to be aware of is what are some of the new compensation and pay equity laws that may frame that conversation?

16:23Number three is, you know, how do you manage the expectation setting elements of compensation negotiations? And then what is the right style or posture to take during a negotiation? um so there's lots of different things and mike i'm very happy to go through these at a high level one by one uh yeah let's let's just touch on the on the first one because also in that is know what you're getting paid now so you don't like you know i've had people leave like two months ahead of getting massive grants because they weren't paying attention right so first of all when to discuss compensation with a recruiter or a company.

17:04So when in the process, I think timing is delicate. I think if you start asking about compensation too early, you risk coming across as overly focused just on the money side, as opposed to the challenge or the opportunity. On the other hand, if you leave the conversation too late, you may be wasting time if your expectations don't align with where the company or the role wants to pay. There is an element of negotiation theory that says, look, the first person to put a number out there is essentially setting the anchor in negotiation. I do think there is some truth to that. But that anchor that you throw out also has to be grounded in some sort of reality.

17:43You can't just throw out, I think, silly numbers, because I think you lose your expectation. Unless you are Elon Musk, apparently. I think we're looking at a trillion dollars, I heard. No, I think so. And then, you know, I think also be ready with what is the right response. And we'll come to this in a second, because increasingly now recruiters and their representatives are essentially trained to ask about expectations, not about compensation history. And the reason for that, Mike, is a number of compensation and pay equity laws have passed on a state level, not a federal level, to be clear, on a state level over the last 10 years.

18:24California, New York City, Oregon, Delaware, Massachusetts, Illinois, the state of Washington, and others. I mean, put bluntly, it's the blue coastal states, Mike, is where a lot of this is happening, where now recruiters are actually prohibited asking about compensation history. instead now and certainly everyone at Spencer Stewart is trained to ask about expectations not about history to be clear candidates and you can still volunteer your history it's not required but we cannot directly ask it now here's my honest experience of handling this Mike when I ask the compensation expectations question most people do not know how to answer that question for exactly the reason we said i said a number too high or too low i'm going to look stupid or i'm leaving something on the table i'm going to come across as greedy i'm not getting 80 to 90 percent of people do not know how to answer the expectations question and they end up reverting to well well look here's where i am because that's the one number they know right inadvertently candidates may choose to share history but just be aware recruiters in many jurisdictions cannot and should not and will not directly ask you about your compensation history.

19:43What they can do and should ask you about is what's referred to as forfeatures. So if you were to walk away, what are you leaving on the table? This was your point. I mean, are you leaving at the right time? When is something vesting? What do we need to be aware of? What short-term annual bonus could you be leaving on the table? Right. If I'm three months ahead of bonus, I'm leaving a lot of bonus Maybe on the table, particularly acute for searches being run this time of year. So, you know, late Q3 and Q4, most companies run on a fiscal year that aligns to the calendar year. Bonuses are paid.

20:24Typically January through coming to the final quarter. Now you are essentially, if you leave in Q4, you're essentially giving up most of your last year's accrued boats. How is that going to be taken care of or accounted for? that's an example of a forfeiture the all the equity we spoke about you know what is it worth over what period of time when is it going to vest if you leave are you giving it up that is a forfeiture a recruiter can could and should ask you about that and you should be ready to address and and answer that that question this is a broader point around what these compensation laws are and what you need to be ready for.

21:05This expectations thing, as I said, look, that is the topic that I think most people struggle with. What I would say is, look, do a little bit of research, use recruiters, use your peer networks, maybe even use some proxy statements where relevant, although as I said at the beginning, 4 % of companies even have a marketing leader on their proxy statement. But be thoughtful, put an aspirational, anything that's too high or too low can frankly send the wrong signal. And beneath all this, I'm hearing know how you get paid, know how your company rules are in terms of vesting bonus, because the bonus may get paid at the end of the year, but you also may have to be in seat in February 15th or March 15th to get it.

21:52So you really want to know the rules and you don't want to be fumbling around with it. But and then, you know, you were you were telling us how to manage the question about what are your expectations? Are there any other best practices in there? Well, here's where I would go with the expectations question. I get all sorts of responses to this. I mean, part of it is, you know, a savvy candidate will actually turn the question around on me. Right. I mean, it's not, you know, and in most cases, I'm not flying blind. I mean, most recruiters are going into a role in a search with some knowledge, roughly speaking, may not be gospel truth, but directionally where the role is.

22:35Again, a recruiter doesn't want to tip their hand too much or give too much away. So it's a really delicate dance. But I find the more savvy, sophisticated candidates will actually push it back and put me in a slightly awkward way. And do a thing like, hey, Richard, do they have a range they are thinking about for this job? Precisely. So I would actually think about pushing back on that. It's not so much pushing back, but actually responding to a question with a question, almost making it rhetorical and seeing what information that may reveal. I mean, at the end of the day, Mike, this is all about information asymmetry.

23:10The recruiter has more information than you do about compensation's role. And this is not the right. I don't want to say that they're trying to exploit that. That is not the case. But they are trying to get to a solution that works for their client. Remember, recruiters, executive search consultants are paid by clients. They're not paid by candidates. And so they want to do what's right by the client. Now, what I will say to my clients is you are not only looking to recruit a candidate, you're looking to retain a candidate as well over the long term. So being penny wise but pound foolish on compensation negotiation often can backfire.

23:49So you had your four things. Did we get through all four here? I'll give you one other, which I think is really interesting, which is once you get into a negotiation. So how does a negotiation actually work? My general feeling and experience is there is there's typically one round of negotiation. So you get one big ask after you get. Correct. In other words, let's say you're the chosen candidate. You've gone through all the interviews. Probably the referencing has been done. All the background checks have been done. The offer is forthcoming. There may have been some expectation setting or there may have not before you received the offer.

24:25But now you get the offer. In most cases, the offer is expressed verbally first. Right. And then, you know, can you accept this offer? Yes or no. In my experience, that is your moment as a candidate. That is your moment of highest leverage. They've made it clear they want you. They've probably maybe even switched off most of the other candidates. So, you know, the eggs are all in the basket here. They want you. They want to make it work. You haven't committed. This is your greatest moment of of leverage. That said, you know, it is about doing the right thing. In my experience, there is this is your opportunity now to respond to this and very clearly based on this.

25:03This is what I think I need to make it work. And you really get one shot at this, right? You can say, look, I understand the rules, but I'm leaving a lot of equity on the table. Is there anything you can do with that? And then how many things can you ask for? Okay, so we'll come to that in a second. So now look, a good recruiter should have worked with you to uncover the issues. All these forfeitures that we spoke about, ideally, Mike, that should have been covered weeks ago. There should not be at this point new news or surprises to either party in this negotiation. Now, what you also have to understand, and I try and get this from my clients, is some clients come with what I'll call a full and fair offer up front.

25:53This is it. It's basically best and final, or I'd say very close to best and final, and maybe a little bit of wiggle room. But this is it. We're not trying to do any funny business here. We're trying to give you a full and a fair offer. Or look, there are legitimately some companies that love to negotiate, that love to go through a round, maybe two of negotiation. And again, working with your recruiter, whether it's an external agent or an employee in the talent department of the company, just getting a sense of how a company runs negotiation, what rounds of negotiation you should expect, understanding the company's approach.

26:29That is really critical. And when the recruiter says this is their best and final offer, how do you know if that's true or that's a negotiating tact from the company? Because no one says this is my first offer. Give me a counter. So this is where, look, there's a little bit of brokering that goes on. And this is why I actually think it's helpful to sometimes use an executive, not sometimes, but to use an executive search firm, because I think it can, when there's a third party involved, I mean, it's the same, you know, when anyone buys or sells a house, it can get quite heated. You all have different views on what your house is worth and what someone should be paying for it.

27:08And I think, look, the same is true about ourselves and our services. And I think using a broker to try and take some of the heat out of the negotiation that can truly broker a win-win relationship for both parties, that is where I'd say, look, trust your recruiter. You know, many of them have been doing this for many years, if not decades. They generally know what they're doing. And they're just as vested as you in getting this done and moving on. Oh, yeah. They're there. They don't want to go back to go unless they have a really good number. No recruiter wants to go back to a restart. Yeah. So, look, I think there is some sense of being open, being honest, all parties.

27:48I haven't found that anyone comes to these negotiations trying to screw someone over, Mike. I just have not experienced that. It is about how we find the best available outcome for all parties involved. I do think there is a lot of good faith that exists in these situations. How about other things like the one-offs in the earlier show you mentioned about moving the horses? Yes. No, they're severance. They're severance deals, which is I know I'm going to a higher risk job. Are you going to give me a severance package? How do people think about those? And so this is where I say, look, even if you can't get the base salary number or the bonus number, for example, to be exactly where you want it to be, there are so many other potentially negotiable elements beyond pay.

28:37Right. So severance, sign-on bonuses. We'll talk about that in a second, maybe. Relocation, start date, work location, travel allowances, or even, you know, there are some unusual perks. I think that joke which you always bring up with me is when there was a negotiation about the horse stabling costs. Yeah. I mean, there is some literally crazy stuff that can occur from time to time. My point is there are other, there are many other elements beyond just base and bonus to think about here. I mean, the one we probably should talk about, because this does come up a lot, is severance and separation.

29:13Let's talk about it. So, yeah. So look, Spencer Stewart, as you know, for many years has been publishing a 10-year study about the average tenure of a chief marketing officer. And guess what? It's 4.3 years. That is not particularly long. Now, as you and I have discussed, Mike, it's not that different from the average C-suite member, which is actually about 4.9 years. But look, it's below average. And given the short tenure of chief marketing officers, there is a discussion around, should they, quote unquote, protect themselves? Yes. And that's average. So on the bottom end of that curve, it's one in two years.

29:46So yeah. Now, look, this can be really quite interesting. Here's what I'll tell you up front. But there are some companies that just have a straightforward policy around severance separation. All their C-suite members or however far down the organization they choose to extend this offer are essentially there's a company policy. We're all going to follow it. And, you know, if something happens, then, you know, that will that will come into force. To be clear, if you involuntarily leave. So, for example, if you resign, if you're in accord to take another job, there's no severance or separation there.