Deferred
Compensation: why should I wait to get paid?
When companies
are short on cash, they sometimes offer to pay you later to attract a higher
level of talent than they can currently afford. This is called deferred
compensation. In effect, you are gambling on the future of the company
being rosy enough that you will come out ahead; that two birds in the bush are
better than one in the hand.
Deferred
compensation can take several forms: grants of stock, stock options, or cash.
A stock option
gives you the right to purchase a certain number of shares of stock in the
company for a fixed price. Usually, your option to purchase the stock
expires at a given time, usually after 10 years. The stock options are
subject to vesting, a process through which you gradually earn the right to
purchase the shares of stock over time. For example, you might be 20%
vested after one year, 40% after two, 60% after three, 80% after four, and 100%
after five years. This means that you would be eligible to purchase sixty
percent of your allotted stock after three years.
So, if the stock
is offered to you at $10 per share, and the value of the stock skyrockets to
$100 per share, you could stand to make a lot of money. On the other hand,
if the stock value drops to $3, and it is not in your interest to buy the stock,
you have given up salary dollars for something that is worthless.
Tom, who had
been burned by a number of flash-in-the-pan companies, politely, but firmly
declined to defer his compensation. He told the company that the stock
options are nice, but he was not going to give up a high base salary to get
them.
The grants of
stock are just that: you are awarded a given number of shares of stock
without having to purchase them. Obviously, the value of this grant of
stock will depend on what happens to the price of the stock-and whether the
company is even still in business when you are scheduled to get this grant.
Performance
bonuses and other cash awards are also an option. Make sure that it is very
clear when or under what circumstances the money will be paid. It can be a
fixed time period, or perhaps it will be linked to you or the company achieving
a given performance level.
If the company
offers to pay you part of your salary later, say next year, you might negotiate
for interest on this deferred payment.
You should be
aware that a "rabbi trust" can protect your interests should the company be
acquired or there is a change of control in the board.
Since deferred
compensation is not guaranteed, it goes without saying that your due diligence
on the company is critical in your decision about whether you will risk the bird
in the hand for the two in the bush. Should the company go belly up, you
might be left empty handed.
