Candidate Negotiations Require Specialists

When companies negotiate with outside CEO candidates, many use the same outside counsel that they use for a variety of corporate legal chores. The problem with this is that the candidate uses not a corporate generalist attorney, but a highly toned compensation specialist.
“CEO candidates come packaged with experienced attorneys who do nothing but negotiate employment agreements," says Olivia Kirtley, a director at Papa John’s International. “Attorneys for companies might handle negotiations [with executive candidates at various levels] maybe once a year.”
As more boards become concerned about this mismatch and its potential for overly generous pay packages, they are increasingly bringing in big guns expressly for negotiations with top executive candidates. Bringing in a new face has advantages beyond yielding an employment agreement that’s fair to shareholders. It removes the potential of a conflict of advisory interest.
Robert Stucker of Vedder Price in Chicago, renowned as a candidate’s attorney, says more search committees in recent years have been interested in his services. “Perhaps five years ago, my practice was 90-10 [90% candidate representation, 10% board representation],” Stucker says. “Now it’s closer to 70-30.”
Indeed, the new duality of Stucker’s clientele stems from directors' increasing sensitivity to potential criticsm from governance advocates regarding pay packages that they deem far too rich. 
Avoiding the albatross of burdensome employment agreements also lessens the chances that CEOs will find it too easy to make money for themselves without benefiting shareholders because of weak links between incentive pay and actual performance.
“Boards are really digging in and focusing harder to make sure that every element agreed to in negotiations is a proper decision and is appropriate,” says Stucker.
“More than ever, directors want to make sure that employment agreements are market competitive and in line with new best practices that have been developing in executive comp over the last few years.”
Enter boards like that of Liz Claiborne. “We have a Marshall Plan for advisors,” says Raul Fernandez, chairman of the company’s comp committee. “We have our own set of lawyers and consultants for different situations, and this includes executive contract negotiations.”
A key member of this specialty roster is an attorney specializing in negotiating employment agreements for top execs. “We have someone who handles our contracts who’s really good,” Fernandez explains. “After all, we wouldn’t want to use a generalist for a specialty job. We want to use an attorney whom the candidate’s counsel respects.”
Indeed, experts say, the weight of the company counsel’s name alone can influence the starting position and outcome of negotiations. This is because using outside counsel with a solid specialty reputation sends a signal to candidates’ attorneys l that the company can’t be run over roughshod by the likes of Stucker or Joseph Bachelder, Stucker’s New York equivalent.
“If a company is using counsel who isn’t a specialist, it may be a one-off for them,” says Stucker, whose team works on either side of the negotiating table and includes specialists in pensions accounting, SEC regulations IRS rules and comp plan design who swoop down on contract sessions routinely. “There’s a lot of territory to cover, and if directors turn to their general outside corporate counsel on this, it can hurt them in terms of total comp and linkage of pay with performance.”
By hiring an attorney who isn’t a familiar face at company headquarters, experts say, boards can achieve another goal: ensuring that they receive independent advice. Outside corporate firms handle myriad legal chores for the company — and that means working for the CEO. If these same attorneys are involved in negotiating with the CEO candidate’s attorney, they’re effectively negotiating with their future client.
Such a scenario is ripe for an advisory conflicts of interest even before the candidate is hired because these outside lawyers could be tempted to curry favor with the CEO upon whom they will ultimately rely for a lucrative client relationship.
This sets the stage for a potentially cushy employment agreement conferring mammoth comp down the road — a package the comp committee will have to defend against the slings and arrows of outraged governance advocates and irate shareholders.
“If the search committee uses the normal [outside] corporate firm that they usually do, they’re not only too much of a generalist to do this work, but they do too much other work for the company to retain their independence in the committee’s interest,” says Stucker.
“Search committees need unbiased, objective counsel,” he says, adding that pro-candidate bias can easily set in for lawyers hopeful to maintain or boost billings from the company under the successful CEO candidate’s stewardship..
“Getting truly independent counsel for the search committee is as important as getting an independent advisor for the comp committee,” says Stucker, adding that this move can have a constraining effect on comp packages and can sharpen positive optics for the comp committee down the road.

Moreover, independent negotiating counsel can be retained and coordinated through outside advisors who do search committee work routinely. “We recommend specialized counsel on this for our clients,” says Paul Dorf of Compensation Resources. “We have a laundry list of firms that we feel comfortable recommending, given the industry.”