Don't Hesitate to Negotiate

That might be the main message from some recent studies of pay differences among men and women and minorities of both genders. A review of compensation for corporate general counsels found that there a gap between white males and their female and minority colleagues. As reported on the law.com website here:

According to data culled from ALM surveys (ALM is Corporate Counsel's parent company), proxy statements, and the Minority Corporate Counsel Association, there is good news and bad news on this front. First, the good news: The number of women on Corporate Counsel's annual list of the 100 best-paid general counsel is on a steady and gradual rise. . . . Now for the bad news: When you look at the number of white women, minority men and minority women in the top 100 salary positions over a recent five-year period, there is a noticeable and troubling disparity.

The law.com article notes that the pay gap comes from a complex mix of gender, racial, psychological and generational factors. This mix plays out at negotiation time. With a lower self-assessment of value (based on previous salary, perhaps, or a perspective that the employer "will compensate me fairly after I have proven myself") and a reluctance to actively negotiate, women and minorities, according to the article, may end up settling for less compensation than a white male might under the same circumstances. And if this gap appears among lawyers trained to negotiate and advocate, there is a good chance that there is a similar compensation gap among executives in other positions.

The ALM survey data dovetails with a report from the American Association of University Women Educational Foundation, released earlier this year, which identified a pay gap between men and women across professions, even in the first year after college. According to the report (which can be downloaded here), even controlling for variations in education and other factors, a pay gap still existed. The AAUW report noted that one possible contributor to the pay gap is that women are reluctant to negotiate for themselves and have a negotiating skill deficit because they lack the experience of negotiating for their own benefit. In other words, as the law.com article concluded "you get what you ask for, not what you're worth."

Negotiating Tip

• When you are preparing to negotiate a compensation package, think about those times when you are negotiating for something on behalf of your employer: a supply contract, a distribution agreement, a marketing campaign . . . anything where you have felt comfortable seeking the best possible deal. Take that same approach when you negotiate on your behalf.
  
  

Options Backdating

For some of my thoughts on options backdating and the troubles they cause for HR executives, please read the cover story in this month's Human Resources Executive magazine.

Editorial Note: Human Resources Executive magazine misstates my name as "Michael R. Rosenthal" rather than "Michael H. Rosenthal".

Gender Discrimination in the Workplace? Gee. . . No, its GE.

Do you think that executives are immune from workplace discrimination? Not according to GE Transportation General Counsel, Lorene F. Schaefer, who accuses GE of systemic company-wide discriminatory treatment of (1) female executive band employees, and (2) all female attorneys. Schaefer is highest-ranking legal employee in General Electric’s $4.2 billion Transportation Division. She is seeking to change GE’s alleged discriminatory pay and promotion policies and practices. Schaefer also seeks $500 million in damages for a class of approximately 1500 Executive Band female employees and female attorneys. Each female Executive Band employee and female attorney would receive, on average, approximately $300,000. Schaefer said that “[t]his suit is not only for GE women, but for my daughters and all daughters who should not have to face what I have faced at GE.”

Schaefer’s lawsuit came on the heels of a Supreme Court decision that limits the right of executives and other employees to remedy pay discrimination based on gender or other impermissible reasons. Although a bill will soon be introduced in the Senate to overturn the decision, Judge Alito’s remarks at his Senate Confirmation hearing are worth considering:

There are subtle forms of discrimination and the judicial process has to be attentive to the fact that discrimination exists and, today, a lot of it’s driven underground.

Ferreting out those subtler forms of discrimination may be difficult. But executives who are not satisfied with their career path should consider whether the differences in pay,responsibility and promotion opportunity are truly merit based or instead a by-product of “underground” discrimination.

Leading From Below

The Wall Street Journal published a great article on leadership, “Leading From Below,” in its March 3-4 weekend edition. Executives and managers below the “C-suite” level must look at themselves for leadership initiative and risk-taking because senior managers may be distracted by “demands from investors and analysts for immediate results.” The authors, James Kelly and Scott Nadler, studied managers in two areas that are rarely at the top of a company’s agenda: environment, health and safety and corporate social responsibility. The authors found certain “common threads” among those lower-profile managers who shifted to leadership positions.

The bullet points for the aspiring leader include:

• Make the decision to become a leader.

• Focus on influence, not control -- do your job with your colleagues. “[G]etting people to act on their own to achieve the goals you have in find is far more effective than having them react to your direction.”

• There may never be a “perfect” time to risk taking the lead, so just look for situations where you may be assert your leadership and do not wait for an invitation from the C-suite.

The authors note that in many of the cases they studied, the managers were able to demonstrate leadership without any support from the C-suite. But the authors also recognize that senior executives can take steps to encourage leadership development such as:

• Seeking a broader range of perspectives and encouraging managers, especially those aspiring leaders, to do the same.

• Creating vacuums by identifying important issues without “dictating the source or nature of answers.”

• Posing “what-if” questions that require others to think through the consequences of each step of a proposed course of action. Different approaches may prove to be preferable and managers will become more comfortable with exercising critical thinking skills, rather than merely accepting a decision and executing directives from above.

In my view, the ideas presented in the article apply to all aspiring business leaders regardless of their area of managerial responsibility. At the macro level, the business world may be moving towards a more collaborative model (e.g. Wikinomics: How Mass Collaboration Changes Everything). At the micro level, a collaborative model may be even more powerful because, as the authors note, "[p]eople simply react more enthusiastically to being enlisted in a common cause than they do to being ordered around." The complete article is on the website of the MIT Sloan Management Review, a “journal of management research and ideas.”

More on Potential Limits to Deferred Compensation

Gretchen Morgenson's "Fair Game" column in the January 28 edition of the New York Times highlights the potential problems for executives who participate in deferred compensation programs if the Small Business and Work Opportunity Act passes in its current form. The proposal would apply both to initial deferrals and to earnings on those deferrals and will affect even executives who earn substantially less than the $1 million maximum cap. As the article states, "'[t]he vast majority of people affected by this will be in the $100,000 range.' And it is unlikely that their companies will cover taxes generated by exceeding the limit."

• Example: If your salary is $100,000, and you have $1 million in your deferred compensation account, your savings would have to earn only slightly more than 10% to push you over limit. If that happened, your entire account would be subject to taxes and the penalty.

• Example: A start-up company pays a small salary but has a generous equity-based deferred compensation program. If the value of the deferred equity in one year fails the annualized compensation test, the entire account becomes taxable and subject to penalty.

From a policy standpoint, it is unfair to impose a tax on money that you have not yet received and have no control over. But the Senate Finance Committee would argue that employers can easily solve that problem by paying higher (taxable) salaries if they want to maintain a certain level of compensation for key employees. Or, they can limit deferral amounts to essentially 100 percent of salary, which is far more than the average worker can defer in 401(k) plans.

There is no specific reason to limit deferrals to 100 percent of yearly compensation, other than it is a convenient measure and one the probably tests well politically. Perhaps the final proposal will be modified to raise the limit, but in the wake of the various executive pay controversies and scandals (e.g., option backdating, enormous severance packages), Congress is unlikely to feel substantial pressure to drop the proposal entirely from the bill.

Wal-Mart Discounts Severance Package to $0?

As reported in Advertising Age, Julie Roehm, the former Wal-Mart senior VP-marketing communications, filed a lawsuit alleging that Wal-Mart breached her employment contract when it fired her in December 2006. Roehm has a high profile in the advertising world and her dismissal garnered much attention. There were allegations of ethical misconduct in the selection of an advertising agency and an "inappropriate" relationship with a subordinate, all of which Roehm denies. Her dispute with Wal-Mart over her severance, however, is one that any executive might encounter.

Roehm's contract provided that she would receive base pay of $325,000, a signing bonus of $250,000, annual incentive-based payments and restricted stock worth up to $300,000. The agreement also included severance in the amount of one-year of base pay in the event her employment was terminated. According to Roehm, Wal-Mart fired her ostensibly because she had not "been fulfilling the expectations of an officer of the company." But she claims that Wal-Mart never identified any conduct that failed to meet that standard. She has not received any compensation from Wal-Mart since she was fired, according to the complaint. Presumably this includes the promised severance payments.

Typically, a "failure to meet expectations" is insufficient to qualify as a reason not to pay severance under a termination for "cause" provision of an employment agreement. That kind of language would give the employer far too much leeway to avoid paying severance. It is likely that this case will settle fairly quickly unless there is some unusual language in Roehm's employment contract that gives Wal-Mart more leverage.

Note for Pennsylvania executives: In Pennsylvania, the employer's failure to pay severance due could open the employer up to a lawsuit under the Wage Payment and Collection Law ("WPCL"). If the executive can prove that severance was owed, the court could order the employer to pay the executive additional damages equal to 25% of the severance amount plus the executive's attorneys' fees.

The Ad Age article with more details is here.

When is the Company's Lawyer Not Your Lawyer?

As reported on Law.com, a former Citigroup executive, David H. Trautenberg is suing Paul, Weiss, Rifkind, Wharton & Garrison, "claiming the law firm was conflicted when it advised Citigroup on [his] severance package." Trautenberg was involved in the litigation that ensued after WorldCom imploded because he had approved large personal loans for former WorldCom CEO Bernard Ebbers.

Paul Weiss represented both Citigroup and Trautenberg in his capacity as a Citigroup employee during that litigation. Trautenberg claims that the Paul Weiss lawyers obtained confidential information from him which they then used against him in subsequent negotiations over a severance agreement. Trautenberg claims that he lost $20 million because of Paul Weiss's involvement and is seeking $80 million in damages.

The lawsuit is a cautionary tale for executives:

• First, if the company's lawyer represents both the company and you in litigation, you should remember that there may come a time when your interests diverge from those of the company. Consider seeking independent advice from another lawyer and asking your company to reimburse you for the expense.
  
  
• Second, when negotiating an employment contract or severance agreement, the company's lawyer is not your lawyer and is committed to achieving the best result for the company, not you.

Senate Finance Committee Votes to Limit Deferred Compensation

The Senate Finance Committee approved the Small Business and Work Opportunity Act of 2007. If adopted as written, the Act would cap nonqualified deferred compensation deferrals to the lesser of $1 million or your average taxable compensation for the previous five years. The provision applies to taxable years beginning after December 31, 2006 i.e. this year. Earlier years will be taken into account for purposes of computing the five-year average. So if your deferral for 2007 will exceed your average compensation for the past five years, you could have a problem.

Summaries of this proposal have emphasized the $1 million upper limit, but the proposal would limit deferrals for all executives even those who are deferring substantially less than $1 million.

Failure to comply will result in ordinary income tax on the entire deferral, not just the amount over the cap. Furthermore, the executive would be subject to the same penalties that apply for a failure to comply with Section 409(A) -- interest at the underpayment rate plus one percentage point on the "underpayments" that would have occurred had the compensation been included in income when first deferred, or if later, when not subject to a substantial risk of forfeiture. The amount required to be included in income would also be subject to a 20 percent penalty.

Hollywood Dispute Should Prompt Executives to Review Employment Contract

The dispute between book publisher Judith Regan and News Corporation’s Harper Collins publishing house highlights the thorny issues that can crop up when a top executive is fired. Regan is preparing a to file a lawsuit against News Corporation for wrongful termination and libel, according to her attorney, Bert Fields.

The wrongful termination claim is a breach-of–contract matter that will turn on whether she was fired for "cause.” News Corporation alleges that Regan made anti-Semitic remarks in the wake of the O.J. Simpson “If I Did It” book debacle. Apparently, it is those remarks that News Corporation will rely on to support its claim that Regan was fired for "cause." Regan claims she never made the remarks. But if she did, there may still be an issue whether her alleged statements constituted "cause" for firing her under her contract.

Typically, “cause” includes such behavior as dishonesty, theft, sexual harassment and similar conduct. Depending on the contract language, however, the term “cause” can include a range of other conduct that might be more open to interpretation such as “immoral conduct” or conduct that otherwise “injures” the employer. Naturally, an executive would want the contract to include the narrowest possible definition while the employer would want an expansive definition that gives it more leeway to discharge the executive without having to buy-out the contract or pay severance. Whether Regan’s alleged anti-Semitic remarks, if she made them, are sufficient to constitute "cause" will depend on how her contract was drafted. Millions of dollars are at stake.

Check your contract to see how “cause” is defined. You may want to try to narrow the definition in your next contract, if possible.

For more on the dispute, click here.