Salary Negotiation Guide
June 10, 2010 by Jon Ciampi · Leave a Comment
Preptel’s FREE Salary Negotiation Guide
How do you feel about your upcoming salary negotiation?
If you think you’re negotiating for money these days, you’re missing out on a lot of opportunities that could make this latest job move a positive return to a constructive life-work balance. The good news is that many companies today have compensation packages that make just about everything within their realm of granting you, negotiable. The extra good news is that every performance review is also an opportunity to negotiate base salary, various kinds of bonuses, benefits, stock options, and other incentives that add to job satisfaction and provide financial security.
Negotiation Basics
Negotiation requires some research into exactly what is available. You’ll need to understand your strengths and resources; be able to respond to the needs of the employer; and know your competition while you assess your bargaining position.
In This Corner…
Both sides in a bargaining situation have power. You both have a need for something or for something to happen. Whether you’ve assessed your own specific values attached to each of those things will become very clear as you consider your bargaining options.
Timing Is Everything
The best time to negotiate is after a serious job offer has been made and before you have accepted it. Don’t be afraid to ask for a day or two to consider the offer and get back with them. Show interest, sure! Be enthusiastic! But ask for some time. Sometimes two-session negotiating can help you not make an impulsive decision. Consider one session to firm up the job design and responsibilities and the second to go over compensation and benefits. The key message here is not to make an impulsive decision. If they really want you, there’s time.
Parameters:
- Keep in mind that different companies can give negotiations more or less latitude.
- Smaller companies may be more flexible than large, bureaucratic companies.
- Unionized companies usually have very little room for individual negotiations.
- Make sure if you’re bargaining with items like company cars, everyone is clear about who will foot the bill for maintenance, traffic violations, accidents, insurance, etc.
- Getting things in writing is important.
- Be clear about intellectual property and non-compete agreement if your creative talents are what the company is buying.
Stock Option Negotiations
How can you tell if a company is offering you a good thing when they offer you shares of stock or options as part of your compensation package? An experienced negotiator knows to hold all the negotiation points up to a valuation check!
Annual stock option grants, like cash salaries and bonuses, are used to reward employees for past performance, leading to a positive relationship between the value of new option grants and firms’ stock prices.
Options differ from cash and salary because they have vesting restrictions that could work to retain employees. Thus, option grants could increase, and perhaps substitute for salary and bonus, following stock price increases because firms use options to retain employees, where firm price is a signal of managerial success.
Consider these factors when evaluating the value of your financial package:
- Is the industry strong? How much research have you done on the subject? Is is real research, or a casual observer’s knowledge?
- How has the company stock performed in the last 3-5 years. The average employee will be vested within that period or sooner, and usually cash out or leave the company within that same period. If your current job move represents a long-term employment investment with the company, you’ll want to know about past performance.
- You’ll also want to know about future performance! Depending on the industry, you need to know about pipeline and about research and development efforts that will be bringing new products forward within your tenure as an employee.
- If the company experienced any recent bad press or results (check the news and look for market press at http://www.finance.yahoo.com), prices may be falling for a short or possibly a long ride. What is your investment?
- If you are directly tied in some way to turning some specific indicator area in the company around, definitely think about performance rewards when it comes time to evaluate new and possible future stock prices. Check with analyst predictions and target pricing, then find out how far away the current price is from what the analysts say. Given the current trend (check the “Basic Chart” – 1 yr, 2 yr, 5 yr), to see if the company has been close to this number before. What were those circumstances about?
- If there’s a predicted appreciation expected in the value, look for evidence on the company website to find out why! Check into supporting news stories, and read up on the Def14, 10-K and Quarterly SEC filing reports to find out what the company has in store for the future, as well as to figure out what they may be recovering from in the past.
- Check out the company record on paying dividends. Sometimes analysts favor companies that are delivering solely on stock price, but dig deeper to find the underlying factors that will affect you as an employee!
In this example, the Amgen 5-year performance chart shows that in about October, 2005, Amgen pricing was as high as $85. Judging from the chart, the company has had some specific highs and lows; probably product or approval driven events.
If you look, however, at the analysts opinion and evaluation, you’ll see that they have set various targets at prices not attained yet in 2010. In fact, the mean and median target ranges haven’t actually been reached since 2007. Given stock performance alone, someone may want to consider other performance based compensation.
As you consider possible performance factors, you’ll want to review how the company is doing overall. Have they recently bought new assets? It may take them awhile to get those assets performing, but in the long term, acquiring new interests may improve the long term picture for your compensation investment, or you may want to opt out in favor of other benefits offerings that meet your immediate expectations.
Learn more about reading company Key Stats & Financial Ratios
FINANCIAL RATIO GLOSSARY
| Quick Ratio | |
| Unit: | Times |
| Calculation: | Current Assets less Inventory divided by Current Liabilities |
| Definition: | This is a measure of a firm’s ability to meet short-term obligations without relying on sale of inventory. A ratio of less than one may indicate a potential cash shortage. |
| Current Ratio | |
| Unit: | Times |
| Calculation: | Current Assets divided by Current Liabilities |
| Definition: | This is a general indication of the extent to which claims of short-term creditors are covered by assets that are expected to be converted into cash in a period that roughly corresponds to the due dates of the current liabilities. The higher the ratio, the greater the cushion between current obligations and the ability to pay them. A general guideline suggests that a current ratio less than 2 might indicate a potential cash shortage. |
| Current Liabilities to Net Worth | |
| Unit: | % |
| Calculation: | Current Liabilities divided by Net Worth (or Equity or Investment defined as Book rather than Market Value) |
| Definition: | This ratio expresses the relationship between capital contributed by current obligation creditors and capital contributed by owners. It indicates the ability of a firm to safely meet the obligations of current creditors. The higher the percentage, the greater the risk a firm will not be able to meet the obligations of creditors and a low percentage may be an indication of potential cash shortage problems. |
| Current Liabilities to Inventory | |
| Unit: | % |
| Calculation: | Current Liabilities divided by Inventory |
| Definition: | This ratio provides an indication of the ability of the inventory sales to generate the cash needed to meet the short-term obligation of creditors. A ratio that is low usually indicates that a firm will be able to meet short-term obligations and a high ratio may be cause for concern and signal a potential cash shortage. |
| Total Liabilities to Net Worth (Debt-to-Equity) | |
| Unit: | % |
| Calculation: | Total Liabilities divided by Net Worth (or Equity or Investment defined as Book rather than Market Value) |
| Definition: | This expresses the relationship between the capital contributed by creditors and the capital contributed to a firm by owners. This provides an indication of the ability of a firm to meet creditor obligations. The lower the ratio, the better financial condition the firm is thought to be in. A high ratio may signal a potential cash shortage and a low ratio firm usually has greater ability to borrow debt in the future. |
| Fixed Assets to Net Worth | |
| Unit: | % |
| Calculation: | Fixed Assets divided by Net Worth |
| Definition: | This ratio provides the percentage of assets centered in fixed assets compared to total equity. Generally, the higher this percentage, the more vulnerable a firm becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow to support day-to-day operations. |
| Payment Collection Period | |
| Unit: | Days |
| Calculation: | Accounts Receivable divided by Sales/365 |
| Definition: | This indicates the amount of time a firm must wait after making a sale before receiving payment. A long collection period usually signals high delinquencies and the potential for cash shortages. |
| Inventory Turnover | |
| Unit: | Times Per Year |
| Calculation: | Net Sales divided by Inventory |
| Definition: | This ratio is a measure of the efficient use of inventory or the ability of a firm to turn inventory into sales. Generally, the higher the ratio, the more efficient the company’s use of inventory and a low ratio may indicate potential cash shortages. |
| Assets to Sales | |
| Unit: | % |
| Calculation: | Total Assets divided by Sales |
| Definition: | This ratio is a measure of a firm’s productive use of assets and a low percentage compared to the average for an industry usually indicates high asset use efficiency. If a firm is more highly labor intensive than most in an industry, or if fixed assets are largely depreciated, a ratio may be distorted and falsely indicate higher asset efficiency than is the case. |
| Sales to Working Capital Ratio | |
| Unit: | Times |
| Calculation: | Sales divided by Current Assets less Current Liabilities |
| Definition: | This ratio measures how efficiently working capital is being used. A low ratio may indicate inefficient use of working capital, while a high ratio may signal potential cash shortages and the risk of not being able to pay creditors. |
| Accounts Payable to Sales | |
| Unit: | % |
| Calculation: | Accounts Payable divided by Sales |
| Definition: | This ratio provides a measure of a firm’s ability to generate sales revenue to cover supplier expenses. A low percentage may indicate an over reliance on supplier credit to support sales. |
| Return on Sales (ROS) | |
| Unit: | % |
| Calculation: | Net Profit divided by Sales |
| Definition: | This ratio shows the percentage profit earned on sales by a firm and it is important to compare a firm’s performance with that of similar size firms in the same industry. This ratio should increase as the volume of sales grows because fixed costs are spread over more units of sales. |
| Return on Assets | |
| Unit: | % |
| Calculation: | Net Profit divided by Total Assets |
| Definition: | This ratio measures the return on the total investment in assets including those financed with debt as well as equity. This is an important measure that should be compared with similar size firms in the industry. |
| Return on Net Worth (ROI) | |
| Unit: | % |
| Calculation: | Net Profit divided by Net Worth (or Equity or Investment-Book Value, not Market Value) |
| Definition: | This ratio is a measure of the return or earnings on the money invested in a firm. This return must be high enough to provide owners with an adequate return for the risk that is being assumed by keeping investments in the firm. A low return will also make it difficult to attract additional investment capital in the future. This measure is best compared to similar size firms in the same industry. |
| Sales per Employee | |
| Unit: | $ |
| Calculation: | Sales divided by the Total Number of Employees |
| Definition: | This is a measure of the productivity of employees and can give a firm an indication of appropriate staffing levels when compared to similar firms in the same industry. In addition, this is a measure of how capital or labor intensive a firm is. A low measure may indicate that a firm is labor intensive (or over-staffed) and a high measure may indicate a firm is capital intensive (or under-staffed). The management of labor resources is important to the success of a business and this is an important measure to compare with other firms in an industry. |
| Profit Per Employee | |
| Unit: | $ |
| Calculation: | Net Profit divided by Number of Employees |
| Definition: | This is a measure of the profits a firm is generating for each employee working for a firm. The management of labor resources is important to the success of a business and a firm should carefully compare both sales and profits per employee for a firm with similar firms in an industry. |
| Interest Coverage | |
| Unit: | % |
| Calculation: | Earnings Before Interest and Taxes (EBIT) of One Period divided by the Company’s Interest Expenses of the Same Period |
| Definition: | This ratio measures how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. |
| Financial industry data provided by Fintel — offering leading benchmarking with a database of over 900 industries. Utilize financial analysis through profitability, liquidity, sustainable growth rate, business valuation, custom research, and other tools. Visit us on the web at www.fintel.us/firstresearch to find out how we can help you. | |
About Jon Ciampi