In the Trenches: Dirty negotiation ends with mud on Acme's face

July 12, 2006
After Acme lured away a capable maintenance manager with an overly generous offer, it tries to negotiate the deal half-way thru. When the manager refuses the renegotiation, Acme creates unreasonable goals for him and fires him for not meeting them and are saddled with a lawsuit. Find out what each could have done to avoid such a messy situation. Only the names have been changed to protect the innocent.

Riding high in its mid-1990s saddle, Acme lorded over a niche market and absorbed many of its competitors, turning what was once a well-run Ma and Pa operation into a consolidated powerhouse. Now, with 27 manufacturing plants scattered from one coast to the other, Acme splits the country into six regions, each with a director whose job is to manage the maintenance function and expand a code of corporate-wide maintenance best practices.

The Acme culture is big on key performance indicators, and the main metric for the maintenance directors is overall equipment effectiveness, which is the product of the percent of time a machine is available for production, the percent of good-quality product it makes and the percent of the maximum production rate that it’s operating. The maintenance directors have direct or indirect control over all three factors.

Acme hired Mel Batoste as managing director of maintenance and assigned him the four plants in the Midwest region. Acme lured Mel away from a secure, well-paying job, where his prospects looked quite rosy. Getting him to take a gamble aboard the good ship Acme required not only a $150,000 base salary, but additional pay in the form of shares of Acme stock and guaranteed bonuses worth $100,000 for 2001 and $110,000 for 2002. A provision in his contract stipulated that if Acme terminates him for any reason, other than cause, before he’s been on the payroll for two full years, he’ll receive the balance of his unpaid salary and the bonus for 2001.

After Mel had been with Acme for about one year, Jerry Mander, Acme’s COO, approached him about renegotiating his compensation guarantees. Mel felt that both parties had dealt in good faith originally and he saw no reason to change the terms of the contract now. Because it made no sense to go along with a move that wasn’t in his best financial interest, he refused the overture. A few days later, Jerry informed Mel that his performance was being reviewed closely and that the regional boundaries were being changed, at least for the purposes of maintenance accountability. This involved shuffling half of the plants under Mel’s control. Now his portfolio included two badly-performing plants. When the change became final, Jerry again insisted that Mel give up his compensation package. Again, Mel refused to hear of it.

Six months later, Jerry approached Mel about renegotiating his bonus package and told him that, no matter what Mel thought, Acme was going to prevail in this matter. The idea didn’t make any more sense to Mel now than it did earlier. But now it was delivered as a threat. When he refused to consider it, Jerry told Mel that his performance had weakened recently and if he didn’t rethink this business about giving up the bonus plan, Acme wouldn’t be able to predict the final outcome or consequences. Mel was baffled about how anyone could view his performance as weak. In spite of being saddled with ineffective plants, Mel coached them into improvements. The KPIs at the plants under his control ranked third in the field of six regions.

Two weeks later, Jerry sent Mel an e-mail telling him the key performance indicators for the plants under his control were unacceptable and that Mel would be fired if he didn’t raise their aggregate overall equipment effectiveness to at least 93% within the next calendar quarter. Mel found this demand to be outrageous. The highest historical OEE Acme had ever seen at any single plant was only 89%.

Despite a valiant effort, Mel didn’t make the bogie. When the next calendar quarter closed, Jerry fired Mel for cause, using the excuses of insubordination and an inability to perform the duties for which he was hired.

Not one to look back, Mel started his job search in earnest. Aware of the high probability of a background check for someone in his salary range, Mel was straightforward about the fact that Acme fired him for cause because of the claim he didn’t meet the performance standards, and he had a well-rehearsed explanation. Soon, it became apparent that honesty wasn’t necessarily the best policy for one who is looking for a job. Every employer he approached gave him the “thanks, but no thanks” brush off. It became very clear that Mel couldn’t negotiate from a position of strength as long as this Acme situation dogged his heels.

Mel resolved the issue in the classical American manner by suing Acme for breach of contract for imposing additional unnegotiated job expectations; publicizing false, defamatory reasons for his departure and refusing to honor the guaranteed bonuses he was promised.

How could this situation have been avoided? Is honesty still the best policy? Are there more effective ways to attract talent? Are there objective ways to determine if expectations actually are unrealistic? Is it ever permissible to use white lies during the job hunt? What recourse does one have if terminated on the basis of lies and twisted truths? Is unwavering adherence to management by the numbers beneficial in the long run? Would Mel have done better to negotiate with Jerry without ever actually intending to accept a new offer instead of simply rejecting the idea?

An attorney says:

Acme certainly would have improved its chances of prevailing in Mel’s suit had Jerry Mander not threatened Mel that his refusal to renegotiate his compensation package would have dire consequences. Jerry provided Mel with wonderful evidence to use against Acme in a lawsuit with his threats, not once but twice. I don’t think a jury will like this one.

Fair is fair. Acme may have believed it made a bad deal with Mel. But both our moral code and our system of justice expect people to live up to their bargains. By all reports, Mel lived up to his end of the agreement, and even after he was saddled with poor performing plants, he eked improvement from them. Given the cost of litigation today, it might have been cheaper for Acme to pay Mel what he was due under the contract than to meander its way through this piece of litigation with a bad ending likely in store for Acme.

What could Acme have done to avoid this scenario? At the outset, few employers possess a crystal ball. However attractive a candidate might look at the recruiting stage, sometimes skim milk indeed masquerades as cream.

Acme could have offered Mel a more modest sign-on bonus to lure him away from his secure well-paying job and built incentives into the employment contract. For example, Acme could have conditioned the annual bonus on Mel achieving key performance indicators or increasing overall equipment effectiveness to a certain level. Acme might have been happier coughing up the bonus dollars in exchange for increased performance at its plants.

Unfortunately, Mel is unlikely to come out much of a winner either. Regardless of how much he may recover in the suit, he will continue to face the stigma of having been terminated for performance reasons in his job search. It is never wise to tell lies, white or otherwise, in the course of a job hunt. Falsifying an employment application constitutes a universal reason for immediate discharge.
Julie Badel, partner
Epstein Becker & Green, P.C.
(312) 499-1418
[email protected]

A corporate consultant says:

Acme deserves to take it on the chin in this case. No one forced Acme to agree to the terms of the contract — indeed Acme was the party who made the offer in the first place.

Adding insult to injury, not only was Acme wrong per se, it also behaved with considerable dishonor and stupidity. Attempting to engineer Mel's failure by re-distributing his territory, raising the bar on performance to levels never before achieved by anyone, and threatening Mel's job if he didn't capitulate is tantamount to gangster tactics. Embracing this type of legal vulnerability when Mel had less than a year left was just plain stupid.

As for Mel, he was surprisingly naive. He simply allowed the contract to be breached, allowed himself to be terminated and, apparently, had no intention of suing until his "truth telling" proved unsuccessful. Mel should have sought legal advice upon being approached by the COO the first time. This would likely have equipped him to respond as a more worthy adversary, which would likely have elevated Acme’s awareness of their legal risks.

Preventing this situation would have required that Acme execute one of two options: either refuse to enter into such an employment contract, or, having entered into it, honor it.
Francie Dalton
Dalton Alliances Inc.
(410) 715-0484
[email protected]

An academician says:

Let’s start with performance contracts — one of the dumbest things a company can do is not basing an executive’s compensation on performance. There are far too many companies that are paying executives big bucks when company performance stinks. That’s a bad, bad idea. If you want a company to improve, better link compensation to performance. And if the company does improve, make sure those responsible receive a nice reward.

Although the details are a bit cloudy, it appears that Acme could use some help in negotiating performance contracts. It doesn’t make much sense to offer a guaranteed bonus of a specified amount. That’s not a bonus; it’s part of base salary. Bonuses aren’t guaranteed. Bonuses might be part of an incentive plan, i.e., if you hit a specific target, you get a specified amount of money or stock. Or they might be part of a discretionary plan, which says that if you do well, you’ll get a bonus, but the exact amount depends on company performance and other such measures.

So, I like incentive systems, but don’t like Acme’s “bonus” system, and I sure don’t like Acme’s treatment of Mel. When people asked Jack Welch what business GE was in, he always replied that GE was in “the people business.” By that he means the key to GE’s success was developing and rewarding people who could produce. Acme’s strategy is puzzling — first, they hire a guy who has a reputation for producing, and then they turn around and screw him. Not good strategy. My take is that Mel should stay, and Jerry should go. Mel seems to have his head on straight, but Jerry doesn’t.

Finally, Mel is better off not being part of Acme. If one has talent, why would they stay with a company that doesn’t reward it? What should Mel say on the job hunt? I wouldn’t advise him to lie. He might explain that Acme hired him under one contract, but then refused to honor it. He should emphasize the performance of the units under his leadership. He apparently did quite well, even when saddled with some turkeys. A lot of good companies look for people that can produce results (Acme did when they recruited Mel), and I have to believe that other companies out there are looking for someone who can deliver.
Professor Homer H. Johnson, Ph.D.
Loyola University Chicago
(312) 915-6682
[email protected]

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