From The Wall Street Journal Online

Elliot Sirota can tell you what not to do when negotiating a compensation package.

"I joined an early-stage company that was offering what I thought was a decent package -- incentive stock options and grants equal to 2 1/2% of the value of a company that I figured was valued at the time at $4 million," he says. "There wasn't a whole lot of negotiation, but I thought, 'The options are worth nothing today, but when the company grows to $10 million that's going to be a lot of money.' "

Eighteen months later, "the company's value has stayed the same," the 40-year-old says, "and with the stock market the way it is I don't see us launching an IPO anytime soon." Mr. Sirota, who manages a company that provides call-monitoring services to call centers, now wishes he had set more realistic expectations of how quickly the company would grow, and argued more strenuously for a deal that would have given him more cash upfront.

When it comes to getting paid, cash is king now that the bubble has burst. But stock options can still play a valuable role in your compensation package and understanding what you're worth is key to negotiating a good deal that includes both a good base salary as well as a strong option component.

While the recent market turmoil has turned a lot of people off to stock options, in practice these incentives can pay off handsomely. Remember: Past performance is no guarantee of future returns.

If you work for a company like Cisco Systems, which has seen its stock battered in recent years, stock options may not look all that attractive right now. But remember that many stock-option grants have expiration dates 10 years down the road. If the prospective employer is a solid company in an industry in the process of weeding out the excess, chances are the stock may show a handsome return by then.

Haggling for anything is difficult for many people, and when it comes to wrangling for a sweeter compensation deal, the experience can be downright daunting. Once a company has made you a job offer -- and don't shortchange yourself by discussing compensation before an offer is extended -- here are some tips to help you negotiate a better compensation package, including stock options.

Do Your Homework

Hold up, let me say that again ... do your homework. You'd be surprised how many people walk into salary negotiations without the foggiest notion of what they're worth in their respective industries.

The Web's vast resources can help you determine what kind of salary you might reasonably expect to earn based on your experience, background and where you live. Dow Jones & Co., publisher of the Wall Street Journal and WSJ.com, offers a free "salary expert report" that will determine the median base salary of someone in your profession, depending on your location. For example, the site shows a job candidate for a human-resources director position in Boulder, Colo., could expect to command salary of $137,840 a year. For a fee ($49.95), compensation-consulting firm Salary.com, Wellesley, Mass., will generate a detailed salary report that you can use to back up your estimate of what you're worth to a prospective employer.

But keep in mind, this median salary number is the starting point of an overall compensation package. The report I just mentioned also indicates that, when adding in benefits and bonuses, the average total compensation for someone in that position would be $178,562.

If the company is public, and your position is upper management, you may glean some insight on whether your employer is willing to pay more than the median by perusing financial statements. "I encourage my clients to do their due diligence, and find out what other key officers are making in terms of salaries and options, and where [the candidate] fits in that picture," says Stephen Bangert, Ph.D, director of interview assistance with executive-search group WSA Corp. in Shawnee, Kan. Even if the company isn't public, getting salary information from a public company in a similar business can give you some insight on what you can reasonably ask for.

Hear Them Out

Once you know what you're worth in the job market, you're ready to hear your prospective employer's offer. I didn't say negotiate, I said hear what the company is willing to put out to get you.

Get the offer in writing if at all possible; if not, be sure to take copious notes. Ask specific questions about the rules and restrictions governing your stock-option plan: When can I exercise the options? How soon are they vested? Can I buy and sell them at the same time or must I exercise and hold? For how long?

Let your employer know you're still highly interested in the position, and that you're certain you can handle the job, but ask for more time to consider the offer.

"You'd be surprised how many people aren't prepared to enter an extended period of negotiation," says Janet Scarborough, executive coach at career-management firm Bridgeway Career Development in Seattle. "If you introduce space between when the offer is made and when it's accepted you usually increase the value of the package."

What Are They Worth?

Offer in hand, now you'll face the trickiest part of salary negotiations: valuing the stock-option package.

"When I'm working on a negotiation, and it's not completely clear what the value of the stock options might be, I'll direct my clients to an accountant or compensation lawyer to help them get a handle on realistic valuations," says Ms. Scarborough. "Sometimes, what the company says the options are worth, and what they're actually worth, are light years apart."

Options come in different flavors, all with different tax implications that can affect their value. See the sidebar to the left for more details.

Too often job seekers focus on the sheer number of options they're being offered, without placing realistic expectations of what they might be worth down the road. Also remember to keep percentages in mind: If you're granted 100,000 options, they're worth far less if there are two billion shares outstanding than if there were one million. And a big option package in a worthless company doesn't mean much, as many bitter dot-comers will attest.

The most popular method for valuing options is the Black-Scholes method -- pioneered by namesake professors Fischer Black and Myron Scholes in the early 1970s. This mathematical calculation takes into consideration an option's exercise price, the history of stock-price volatility, and the length of time to the date of exercise, among other things.

Smoke coming out of your ears? No worries, you can find various Black-Scholes calculators online that will do the work for you, including this easy-to-understand one, created by Dr. Robert Lum and hosted by technical-consulting firm Intrepid Technology Inc., Mountain View, Calif.

Stock-option valuation in hand, you can determine how a public company uses the Black-Scholes model to value its stock options, including their expected stock-price volatility, in the company's 10-K filing with the Securities and Exchange Commission. Look for the section typically labeled "stock-based compensation."

Bruce Brumberg, co-founder of Mystockoptions.com, a Brookline, Mass., online provider of compensation information, says people considering an offer at a private company usually can use a ballpark estimate. "The best is to try to come up with a cash-equivalent value. Take the number of options and the exercise price, say 10,000 options at $10, and then take 30% to 40% of that total $100,000 value. That will give you a ballpark figure of what that package may be worth by the expiration date, usually 10 years down the road," he says.

When all else fails, a financial planner, accountant or lawyer with expertise in the area of compensation should be able to assist you in determining a figure grounded in reality.

Get Down to Business

Now you're ready to sit down and commence with the bargaining. The line between demanding that you get paid what you're worth -- and giving your prospective employer the impression you have an overinflated sense of self-worth -- is a thin one, so watch your step. With the economy in flux it's not exactly a job-seeker's market, so while it's important to negotiate remember that the seekee often has the upper hand.

While there's no set formula for successful salary negotiation, it's usually best to start off with base salary -- cash on the barrel -- and work down from there. "Almost for the asking you can get an additional 5% just by asking," says WSA Corp.'s Mr. Bangert.

Once you've come to an agreement on base salary, you can move on to stock options -- and here's where it's crucial to have your Black-Scholes drudgework done ahead of time. If you reckon your stock options are worth $20,000, and your overall salary/stock-option package totals $120,000, you have some wiggle room to demand a much greater number of options if you know that the tiny pool of potential candidates with your level of expertise has driven total compensation packages for people in your field to the $140,000 range.

Know When to Fold 'Em

You don't want to appear unreasonable, but if the incentive-options package you're being offered isn't all that you want it to be, you may be able to convince the prospective employer to pump up the value by offering to give up something else you've already been offered.

For example, if you're married and your spouse has a generous health-benefits package that covers you both adequately, you might offer to "opt out" of the plan and save the company from paying the premium, or if you're adequately covered by your own life-insurance policy you can offer to forego having the employer carry pricey corporate coverage. In return, for example, you might ask for more flexibility in when and how you're permitted to exercise your stock options, or finagle a loan to help you pay the costs associated with exercising those options. Be sure to calculate the value of the incentives you're willing to give up before you sit down to negotiate.

The Kicker

Once you're satisfied that the stock-option plan being offered is acceptable, it's time to take the gloves off. "This is where you should say, 'OK we've got these lovely stock options, and that's nice but they can mean zero in terms of real compensation so what else have you got?'," says Royce Campbell of Executivesonly.com. Slipping in that last comment, and then sitting quietly in order to allow your employer to respond, can get as much as an extra $10,000 in salary on average, he says. If the employer isn't forthcoming, nudge them along by asking what other financial bonuses or non-cash incentives the company is willing to offer.