Article #27 From the "What If ..." Library on Salary Negotiations

What If ...
 
                                             They Offer Deferred Comp? 
 
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.