Salary negotiations in private equity: how to get the focus right. In our experience, two things decide the outcome: content and process.
On content:
What happens to my stake when the company is sold?
Which risks are being balanced against which opportunities?
How will an upcoming refinancing affect the value at exit?
What happens to my stake if I leave (early)? (!)
What are the tax implications of the agreements?
How are good leaver and bad leaver defined?
That last point in particular is, in my view, often badly underestimated. “Let’s be successful together!” is the euphoric slogan at the start, and it often ends in disappointment.
On process:
Transparency is critical. An offer must be clear and easy to follow, and it should match the candidate’s basic expectations.
Fatal:
offers that start low and are raised bit by bit, salami-style.
Basing the offer on the candidate’s last salary, even though the market generally pays considerably more for the role. Investors with no clear view of the underlying business case, the market risk and the value creation potential over the holding period.
Improved offers that first have to be debated at length.
We’ve seen term sheets handed to a lawyer after endless back and forth, who then took another two weeks. That infuriates candidates. Or pay guidelines being changed or questioned in the middle of discussions with the candidate. Large pay gaps within the leadership team, which sooner or later come to light, are particularly delicate.
But candidates can perform astonishing U-turns too: suddenly the pay is to go through a limited company, or the candidate wants to be hired nominally as a freelancer. We once had a candidate who, after every discussion was concluded and the contract for the agreed permanent role was on the table, suddenly wanted to work as an interim manager instead.
Candidates are more willing to accept an offer when they fully understand the investment structure and the expected outcome. Poor communication and drawn-out internal discussions, on the other hand, can damage the negotiation. Delays caused by internal (often political) debates can put off high-calibre candidates.
