“No Less Favorable” Clause – Helpful, Especially at Negotiation Impasse

“No Less Favorable”
– A Powerful Negotiating Concept

ACTUAL CASE HISTORY: In 1995, Petra joined a small St. Louis-based software development company as its 10th employee. She was hired to assist one of the three partners in his dealings with prospective customers. Over the next seven years, Petra worked hard, and grew in responsibility as the company grew in revenues. Seven years later, in 2002, there were 185 employees, with offices in four cities. While rising to the position of Senior Vice President of Business Development, Petra had helped build the customer base from 38 to 174. Unfortunately, her compensation hadn’t grown nearly as much.

Petra experienced first-hand what few people realize: rapidly growing companies struggle increasingly to pay bills, to balance cashflow, and to maintain sufficient working capital. As is common in growing companies, cashflow always seemed tight. Every equipment purchase, every marketing campaign, and every new office seemed to devour available company resources. For Petra, this meant her raises had been minimal, her bonuses had been negligible, and her benefits remained limited. Petra’s boss knew her value, and prized her contributions, but felt he couldn’t afford to do much better. When Petra asked that her compensation be raised to what she thought was “market” for her skills, her boss shrugged, and said, “maybe next year,” or “possibly, if we go public.” Petra even asked about the possibility of “becoming a partner,” but was told, “We’re not ready to do anything like that.”

In January, 2002, just before Petra’s scheduled annual performance review, she consulted us. She didn’t want to leave the company; in many ways it was like her “home.” At the same time, she felt she wasn’t earning enough for her family, her retirement, and her kids’ education. And given the poor state of the economy in 2002, there didn’t seem to be many jobs available in software sales. One suggestion we made was that in her negotiations she request “no less favorable” treatment. In other words, if the company ever decided it could provide its executives compensation, benefits and equity at a level closer to “market,” then Petra, too, would be entitled to that same — or better — treatment. In international trade and diplomacy, this is sometimes referred to as “most favored nation” status.

At her annual review, Petra raised the issue with her boss. “You know, Jim, if and when the company finally does have the revenues to give market-rate compensation and benefits, I’d like to know that I’ll be first in line.” “Sure,” he responded, “Isn’t that what I’ve always told you? . . . when we have the money.” In fact, that was exactly what he’d told her for years. In his memo to HR confirming Petra’s two percent raise, Petra had her boss insert a notation that “Petra has expressed disappointment with her raise this year, and in prior years. When the company elevates its executive compensation in the future, Petra should be treated no less favorably than other executives at her level.” It wasn’t money in her pocket, but it was potential advantage, which is better than no advantage at all.

Over the next two years, the company started to hire more seasoned executives, apparently to prepare itself to “go public.” First came a Chief Financial Officer, then a Chief Operating Officer. In turn, they brought on board trusted lieutenants they knew from other companies. And to do so, promises had to be made of market-level compensation. One decision reached was to distribute stock options to senior executives to provide greater incentives. In late 2004, the “unexpected” took place: Petra’s company agreed to a buyout by a larger, rival company. Everyone was excited, and nervous, too, wondering, “What does this mean for me?” It meant a lot: layoffs and severance packages for some, retention bonuses (bonuses to be paid six, twelve or twenty-four months later, provided you stayed on during the transition) and stock options for others. Unfortunately, the acquiring company had its own SVP – New Business Development, and so Petra was laid off.

Petra did, though, have two important things to be happy about: first, her severance package would be “no less favorable” than those given to others at her level. It turned out that two of her recently-hired colleagues had negotiated significant severance packages when hired; this more than doubled what the company had intended to give Petra. Even better, one of her colleagues was promised stock option vesting if laid off, and Petra got that, too. Second, Petra voiced her suspicion that she’d been paid less than some others over the past two years. It turned out she was right: not only did the company pay her what she’d been shortchanged, but her severance payments was made at the higher salary level, too.

[Had Petra not been laid off, but instead been chosen to remain with her company, being treated “no less favorably” in that event would have been advantageous, as well. In that event, Petra would have received the same level – the highest level – of stock options, retention bonus, and other treatment, too.]

LESSON TO LEARN: In negotiating for yourself at work, consider trying “No Less Favorable.” Especially at times of impasse, when you aren’t getting what you want, requesting “No Less Favorable” may be the best you can do. And it is often granted because granting you “no less favorable” treatment costs your employer nothing at the time. Your request says, in effect, “If right now you can’t afford to pay me what I’m worth, can you assure me I’ll get what I’m worth when you can afford to?” It’s hard to say “no” to such a reasonable, and reasoned, request. It is what we sometimes call a “positional play,” and is often used by smart sports agents, theatrical agents, even the U.S. Government when it is in large-scale purchasing negotiations.

One reason why it can be of such help is that it puts you “up on the highest platform”: someone else may have better leverage in her negotiations; someone else may have negotiated better than you did; someone else may have been granted a personal favor, perhaps payback for an earlier favor. No matter. “No less favorable” gets you the advantages they’ve managed, somehow, to achieve. Consider its use in your own negotiating for yourself at work.

SkloverWorkingWisdom™ stresses pro-activity and planning in negotiating for yourself at work. While our clients are usually adept at requesting workplace “rewards,” they’re less comfortable responding when their requests for “rewards” are declined. Here’s a good tool to try if that happens to you.

WHAT YOU CAN DO: Don’t forget to consider the advantages of “No Less Favorable” in your workplace negotiating, especially if at impasse. “No Less Favorable” requests actually come in a variety of “shapes, colors and sizes,” and can be adapted to many situations. Consider using these, or variations of them:

  • “I know it’s been a bad year, and that bonuses will be lower. At the very least, can I count on my bonus not being any lower than anyone else’s?”
  • “Considering my long-term service, if the firm elevates any of its accountants to partner, can I count on your assurances that no one will be considered for elevation to partner before I am?”
  • Later on, if new investors are brought in, it’s only fair that any future treatment their stock gets – regarding dilution, preferences, or other rights and opportunities – those of us who built the company should get no less favorable treatment.
  • “My present employer provides five weeks paid vacation; you only give three. If you change the vacation policy for anyone, can you include me in that, too?”
  • “If any exceptions are made for anyone regarding early vesting of stock options, I think you’ll agree, no one deserves an exception more than me.”
  • “When the hiring freeze is over, I expect my department will be given the first two new researchers.”
  • “I can accept that the company can’t afford to pay better salaries now. When finally it can, can I count on a raise then?”

Of course, as you would with any promise (or agreement, deal, assurance, pledge, commitment, understanding, handshake, accord, bargain, arrangement, bond, mutual expectation, resolution or pact) make sure you confirm it in writing or electronically, so that it can later be resurrected. We commonly suggest it be done by way of confirmatory email, Memo to File, or “thank you” note.