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Job Offer Negotiation

ROLE INFORMATION FOR JOE TECH

You are a second year MBA student negotiating an employment offer package with Leigh Bultema of Robust Routers (RR). RR is the high{ech firm where you interned during the summer between your first and second years of business school; Leigh was your manager during that summer internship. Your summer experience at RR was personally and professionally satisfying, and RR is a company you would like to work for after graduation. The company seemed pleased with your performance, and Leigh told you before you returned to school that you are one of the top candidates for a permanent job out of the 50 summer interns. Leigh also mentioned at the time that RR would probably make permanent offers to no more lhan 25o/o of the summer interns.

ln late August, shortly after returning to school, you received a letter with the terms of a job offer (this letter is included as an appendix to the Background lnformation provided in the Reader). Unfortunately, the package they sent does not fully satisfy your needs. With RR willing to wait for a decision until March 1, you sat on the offer while pursuing other possible job opportunities during the business school recruiting season. Now it is late February, and you have contacted Bultema to discuss the terms of the RR offer.

The recruiting season has been turned out well for you. ln addition to the RR offer, you currently have offers from another firm in the router business (FourCom) and from a start-up lnternet company. Your primary interest is in finding a business development position, preferably for an established lnternet backbone company. You seek an opportunity that will provide a mix of progressive responsibility, training, and security. Both RR and FourCom look like good fits. RR, in particular, leads the market in technology and sales, and analysts see this continuing for the foreseeable future. RR was also recently named one of the top 50 U.S. companies to work for in a major business magazine survey. The future prospects for FourCom are perhaps less bright, given that FourCom has been losing market share to RR in the last two years.

A disappointing aspect of the RR offer is that it makes you an associate product manager in the terabit router product group; it is not an offer to join the business development group as you had hoped. lnformally, you have been assured that you should be able to move to the business development group within a year or two. Your friends at RR say that management typically is able to follow through on these kinds of assurances if you perform up to expectations. ln contrast, the offer from FourCom is for a product manager position in business development right from the start. The starting salary at FourCom is $101 ,000 ($13,000 higher than at RR), and the signing bonus is $20,000 ($S,OOO higher than at RR). The options package and benefits offered by FourCom are comparable to those offered by RR, although FourCom is offering a more generous relocation arrangement.

Your other alternative - the start-up company - has also offered you a position in business development, with a salary that is comparable to the RR offer. The start-up company is, however, offering a good deal more in options than either RR or FourCom. The potential return, should these options vest in a favorable position, is phenomenal.

However, recent market trends have clearly indicated that investors are much less willing to invest in start-up lnternet firms compared to the past; accordingly, the prospects for hitting it big with stock options in a start-up are somewhere between dim and remote (but not nil). An alternative route to a handsome options payoff in a start-up is if the company is bought out. However, this particular start-up firm is not presently an acquisition target because its technology is regarded as too underdeveloped to bet on at this time. Considering allthese factors, your interest in the opportunity at the start-up is low because of the risks involved. You are wondering, however, if you should use the start-up offer as leverage to improve the package offered by RR or FourCom.

As you prepare for your conversation (negotiation) with Leigh Bultema, you are pondering the issues involved and planning your strategy. Here is your current thinking:

Salary/Title: lmportant to understanding RR's offer is the fact that management levels and job titles are directly linked to the size of year-end bonuses and options. The salary range for associate product manager (the position you have been offered) is $70,000 to $100,000. The salary range for product manager is presumably higher. With bonuses and options tied to levels, it is advantageous to seek the highest possible management level, even if it means taking a few thousand dollars less in salary. With the RR offer on the table at $88,000 for an associate product manager, you are potentially willing to trade off $5,000 in salary if you could arrange an initial appointment to the position of product manager.

lf you cannot obtain the improved title, then some additional salary that brings the offer closer to that of FourCom would be nice. Alternatively, you could explore the possibility of a guaranteed year-end bonus. Your understanding is that year-end performance bonuses typically vary from 5-20% of annual base salary (pro-rated for the first-year employee who starts in the middle of the year).

Assiqnment: Your disappointment over the fact that the offer from RR came in product management rather than business development leads you to wonder if you should raise this in your conversation with Leigh. lf the offer could be switched to business development, you would be willing to take it virtually as is. But on the other hand, you realize that Leigh knows full well about your interest here, and perhaps there are legitimate reasons why you didn't get an offer in business development. Would raising this issue merely serve to alienate Leigh, and therefore make it harder to negotiate other issues? Or is it worth using the fact that the FourCom offer is in business development to try to push RR into a change in their offer?

Siqninq Bonus: You learned from your school's placement office that the average bonus being offered to graduating MBAs this year is around $19,500. However, this broad average includes investment banks and consulting firms, which pay substantially higher bonuses than technology companies. You would feel a lot better taking this job if RR would match the $20,000 bonus offered by FourCom, especially given the high costs of setting up a household in the very expensive Silicon Valley area where RR is located.

Relocation: The relocation sum offered by RR is less than it could be. FourCom's more generous offer includes payment of 50% of the real estate broker's fee involved in selling the condo where you now live. The ideal situation is to have the company cover all costs associated with moving under a relocation plan, and you may want to negotiate a better relocation package at the expense of de-emphasizing your signing bonus. Try to obtain a relocation package that covers all moving costs, broker costs, potential storage while you are searching for a residence, and a flat sum to cover other extraneous costs such as registering

your car. The value of such a package can be worth upwards of $15,000. A lesser option (but still far better than what RR has offered) is for the company to agree to pay for the move, which could be worth up to $10,000.

Stock Options: Given the uncertain short and medium-term outlook for technology stocks in the current economy, it is very difficult to assess the value of stock options. An increase in the number of options or the speed with which they vest could help sweeten the pot, but this is best viewed as a last resort should RR be unwilling to concede on other issues.

Start Date: Start date is not a major concern for you, but apparently it is for RR because Leigh told you that she is desperate to expand the product group as soon.as possible. You did mention to Leigh some time ago that you and your fiancée were planning on traveling around Europe for a few months after graduation in May, but plans for the trip are tentative at best right now. You could use this issue to leverage some movement elsewhere.

ln summary, RR is your first choice as a place to work among the set of offers that you have received. FourCom is a fairly close second choice, and certainly an acceptable alternative. But the prospects for growth and advancement seem brighter at RR. Still, you feel you need to see some non-trivial improvements in the terms of the offer before you are willing to choose RR over FourCom. Ahead lies the conversation with RR's Leigh Bultema.

Exercise 11: Job Offer Negotiation

EXPLANATION OF STOCK OPTIONS

A stock option plan gives an employee the right to purchase shares of the company's stock at a fixed price specified at the time the option is provided. lt is not an actual grant of stock, merely a future right to buy stock. The employee does not actually own any stock until the option is exercised. lf the stock price is higher than the option "exercise price" (also sometimes referred to as a "strike price"), then the employee exercising the option can immediately turn around and sell the stock, making a profit per share equal to the difference between the exercise price and the actual current stock price. lf the current share price is lower than the exercise price, then those options are said to be "under water," having no current value.

The theory behind stock options is that because employees benefit from a increase in the company's stock price, they will strive to be productive in ways that benefit the organization and enhance the value of the firm's equity over time.

The most common form of stock option is a time-vested option: A company specifies that the options "vest" or become exercisable over a fixed period of time in the future. For example, a company might grant options on 750 shares of stock, with 1/3 of the options vesting in one year, another 1t3 in two years, and the final 1/3 in three years. ln this example, the emptoyee can do nothing for a year. After one year, if the stock price is higher than the exercise price, then the employee could choose to exercise options on 250 shares, but would have to wait another year before doing so on another 250 shares, and so forth. A grant of options also commonly would include a company-designated time period after which the options expire (for

example, five years), so if the employee has not exercised by that time, the options no longer exist.

ln this exercise, the employee, Joe Tech, is offered an option on 1000 shares, with the exercise price equal to the price of RR stock on the first day of employment. The offer also says that Joe Tech is eligible for additional grants of 500 options each year if performance meets expectations. RR options vest, or become exercisable, at a rate of 1/3 per year (similar to the example above).

Job Offer Negotiation: Joe Tech and Robust Routers 517

, Offer Letter

Robust Routers, lnc. One Robust Center

555 Silicon WaY Mountain VieW CA 94201

Aggust 25,.2009

Joe Tech 40'l Owen Way Nashville, TN37220

Dear Joe,

On behalf of Robust Routers, lnc., I am delíghted to confirm our offer to you of the position of

Associate Product Manager. Your appointment wíll be effective June 1, 2010. The specifics of

this offer are as follows:

Position: Associate Product Manager, Terabit Router Group

Salary: Starting salary will be $88,000 annually, paid monthly-

Signing bonus:You will receive a signing bonus of $15,000, paid as a lump sum within 30

days after you accept the offer in writing.

Options: You will receive 1,000 stock options at a strike price equal to the share price of RR

on the date of employment. Additionally, you will be eligible to receive a minimum grant of

S00 incentive options after your first year of employment, and on each subsequent employ-

ment anniversary provided your performance fully meets expectations and that you are an

active employee on the subsequent grant date. The strike price for th.ese options is set by

company management and ratified by the board of directors annually. Options vest over a

three-year period (33.3% per year).

Bènefits:Robust Routers provides a comprehensive benefit plan to its employees. You will

be entitled to the benefits detailed in the applicable plan document in êffect at the time you

join the company. Current benefits include health insurance, basic life insurance, dependent-lif" ¡n"ur"n"e, long-term disability coverage, and immediate particípation in Robust Router's

matched savings plan for retirement. The Human Resources Department will send details on

these benefits, along with specifics regarding paid sick leave, vacation leave, and holiday

leave, under separate cover.

Relocation: You will receive a lump sum cash payment of $5,000 to help defray expenses

associated with moving to Silicon Valley. Upon acceptance of our offer, you will receive a

relocation handbook, which will provide detailed instructions regarding relocation benefits

and information on the localarea provided by several real estate firms.

¡ Robust Routers is offering you a position with the understanding that you are not a party to a written agreement coniaining either a noncompele or nonsolicitation clau6Sur

' corporation conducts routine employment checks on prospective employees. Your employment is contingent upon the successful completion and satisfactory results of

these checks.

This offer remains in force until March 1 ,20'10.lf you choose to accept the offer, please sign

and return a copy of this offer letter on or before that date. Should you have any questions,

the appropriate point of contact is the hiring manager, Leigh Bultema.

I

l

We are impressed with your background and experience, and we look forward to having you join the Robust Router team in June.

Sincerely,

reÅLdîr*?,% Keith Hernandez Managing Director Product Management Group

cc: Leigh Bultema Human Resources

PlanningforNegotiations 4n

Planning Guide

This planning guide may be compleied for any important upcoming negotiation:

1. What are the issues to be negotiaæd? ' '

2. What are the priorities among the issues in the bargaining mix?

3. What are.the primary underþing interests?

4: What aie my limits on each issu#walkaway points and BATNAs

5. What are my target points, artd opening reguests on these-issues?

6. Who are thè important constituencìes to whom I am accountable? ' ,

7. What do I þow about the other negotiator's interests, negotiating style, and personal reputation?

8. What overall strategy do I want to pursue?

9. What do I need to assemble--research, dobumedts, charts and graphs, and so ' on-{o make the most efective prese¡tation on what I want to achieve? What

øctici will l.use to present my arguments or.defend igainst the other negotia- tor's arguments?

10. What protocol is important for this negotiation: where we negotiate, when we negotiate, who is present for the negotiatioñ, agenda to be followed, note taking? Also, what is our backup plan if this negotiation fails?

Job Offer Negotiation

NEGOTIATION OUTGOME SHEET

We were unable to reach a settlement.

We reached an agreement, detailed below.

Salary:

Title:

Signing Bonus:

Relocation:

Stock Options:

Other Terms:

Signed,

Joe Tech Leigh Bultema