Tough Choices

You want someone with top-notch talent who can take the company forward in tough times. You've settled on an outsider with a proven track record. Even better, this person wants the job. You're both ready to negotiate a salary and benefits.

But there's a problem: You haven't been able to give current employees raises since the economy began to falter. To attract the best, however, you may think you have to offer a salary that's slightly higher than what other comparable employees earn.

Welcome to a big entrepreneurial dilemma. If you're not careful, you'll create an employee morale problem-even encourage discrimination claims or collective bargaining efforts. "People who have been working there longer may be upset and say your wages are unfair," says Joseph Z. Fleming, an employment attorney with Greenberg Traurig LLP in Miami. "It's a very difficult situation."

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Exception to the Rule
In a time when employers are slashing costs and the majority of employees are stuck with what they're offered, "there's a top layer of employees who can still negotiate on salary and benefits," says Bill Coleman, senior vice president of compensation at Salary.com in Wellesley, Massachusetts. This group includes employees with proven turnaround skills, people who bring profitable new clients with them, and those who possess the most cutting-edge skills in the industry.

Firms negotiating with top-shelf talent are investing in their futures, says Charles R. Greer, a management professor and an associate dean for graduate programs at Texas Christian University in Fort Worth, Texas. Greer has found that firms hiring key talent during a downturn perform better financially a few years later than those that did little or no hiring.

But hiring selectively means creating an exception to the rule, and tongues will wag by the water cooler. You'll have to justify your decision and address the perception of unfairness. Start by being honest with employees before looking outside the company. While letting employees know after the fact might feel most comfortable, it's the wrong approach. Says Coleman, "They think, '[Our employer] was scared to tell us. Why wouldn't he tell us?'"

Call a staff meeting to talk about the need to compete in tough times and how new blood will take the company to the next stage. This conversation is tricky because there's a psychological undercurrent as employees wonder "Why this new person and not me?"

There's always pressure on entrepreneurs to promote from within, says Drew Child, president and CEO of Alpine Internet Solutions Inc. (AIS), a 10-employee software company in Bend, Oregon.

Child, 44, posts openings internally before looking outside the firm and speaks with employees about adding new staff. The firm has a profit-sharing and pay-for-performance program that Child says prevents many perception problems when a new hire is made.

"If you tie results to pay, amazing things happen," Child says. "You're going to earn more money out of that performance metric than by negotiating a base salary." The strategy is working at AIS. The 4-year-old company has annual sales around $1 million and expects to grow up to 50 percent this year.

Besides boosting the bottom line, a pay-for-performance system gives employees the green light to compete with a talented new hire. Many employees will realize that the performance requirements necessary to match this new person may be beyond their skill or commitment level. The important thing is that employees can make the choice.

"If you have a legitimate need for bringing in top talent at a higher compensation rate," says Fleming, "make it clear you're going to allow other employees the opportunity to compete."

Payback Time
Coleman suggests keeping salary as in line as possible with that of other employees as you negotiate salary and benefits with top-notch talent. See where you can use nonsalary compensation and perks, such as stock options or a signing bonus (where a portion is paid upfront, and the other portion is paid in six months, based on performance).

Another idea is to give a new hire a title that justifies the difference in pay. "The risk is that the person has to have the capability to function in that environment," says John Di Frances, managing partner of Di Frances & Associates, a business consulting firm in Wales, Wisconsin. This is something you'll have to decide during the interview stage.

Finally, don't put the issue behind you once the person starts the job. It'll keep you from negotiating more trouble down the line.

Chris Penttila is a freelance journalist in the Chapel Hill, North Carolina, area. She can be contacted at chris@sitting-duck.com or through her Web site, www.sitting-duck.com.