CA(SA) - The Blue-Sky Negotiating Tactic - 90% Of Something Is Better Than 100% Of Nothing!

I suppose that it is only when you do something stupid that you learn a lesson that sticks. The idea of 'learning from one's mistakes' is a good one and might even prevent material loss in the future.

There is no doubt that the business process is all about adding value. Buy for R1.00 and sell for R1.50. The thing is that in an employment situation, often this principle becomes confusing and ultimately overlooked. And very much to your disadvantage.

Here is an example: 

A client of mine, Greg (not his real name) was a CFO in a medium-sized property fund. The company fortuitously received a fantastic offer on a number of its buildings in its portfolio at irresistible prices. Accordingly, they decided to cash out. In the process, a substantial capital gains tax (CGT) liability arose.  

Being the head of finance, Greg decided that there was some meaningful value-add to be created by reducing the tax liability as much as possible. During his CA(SA) studies, Greg developed a keen interest in taxation. He was smart enough to know that his future did not lie in tax consulting. But that did not diminish his interest in the topic. He followed all the changes and always looked for opportunities to structure the company's affairs in such a way as to minimise tax. There was no real magic in the process: he looked for ways to turn revenue profits into capital profits and capital expenditure into deductible expenditure. In those days, there was still a significant arbitrage between the CGT and income tax rate.

He identified some distinct avenues to pursue:

• Maximise the base costs.
• Substantiate all capitalised expenditure and convert them into revenue expenditure where possible.
• Utilise assessed losses remaining in any of the property companies that had become dormant due to disposal of its building.

Greg was creative in the way he approached it. On the face of it, there were no material savings. He had had cursory discussions with the company's auditors, and they claimed that there were no savings to be realised at all! Greg would not take no for an answer and began to refresh his tax knowledge. He became excited when he remembered that base cost amounts could be valued in three ways. When he ran these through all the 'sold' buildings, he saw meaningful increases in the tax valuation of the base costs. Furthermore, he found large amounts of tax-deductible expenditure that had been inadvertently capitalised. 

To cut a long story short, Greg managed to save R50 million in tax. It was a monumental amount! This was startling, especially as when he embarked on the project, savings of this magnitude did not seem likely. The real genius in Greg's approach was not accepting opinions from just one source. He consulted several different tax consultants in the hope of creating the outcomes that he wanted. He was amazed at how cleverly some of these experts were at using the Tax Act to create advantages. 

But this is not the purpose of repeating this woeful tale. What happened subsequently is what was the real issue here. 

When Greg approached the CEO about a possible bonus, he was told that this work was part of his job spec. To request a bonus over and above would not be accepted by the Rem Com.

Greg was gob-smacked. He knew categorically that this was patently incorrect. The savings that had been created was entirely due to his ingenuity. The tax consultants that the company would have usually used (the auditors) offered little input in this regard.

Greg was incredibly upset about this and thought this unethical to the extreme. Subsequently, he left the company in disgust.

The moral of this story is not about the integrity of the people he worked for. It is about Greg's failure to identify a value-add opportunity and structure it in such a way that he shared in the fruits of his labour. 

Things are always easier to assess in retrospect but, had Greg done an upfront negotiation on any savings made, he would have managed to secure some benefit for himself. Furthermore, had he used the "Blue Sky Negotiating Tactic" he could have earned something meaningful from the whole saga.

The Blue Sky Negotiating Tactic? 

This is a subtle manoeuvre that works very effectively. Instead of being blunt about the bonus proposal, Greg could have set a Blue Sky hurdle to overcome in order to calculate the benefit. For example, he might have proposed that he receive 10% of any cash saving over, say, R5 million. 

Two innovative tactics are emerging here:

• The R5 million 'deductible' is large enough to create the likelihood of a minimal bonus payout, if anything at all! Hence it is much easier for the boss to agree to these terms (negotiating with blue-sky!).
• 90% of something is better than 100% of nothing! From the boss' perspective, this is only a win/win situation. So, why not?

Having known the company involved I am sure had Greg taken this approach, he would have pocketed a cash bonus of R4,5 million!

So here is the real moral of this story: always be aware of the value that you are or could add. Maybe a similar opportunity to capitalise on your ingenuity could arise for you!

ABOUT THE AUTHOR:

Clive Kaplan is a prolific writer on LinkedIn PULSE. He has written over 400 articles on various topics from financial management and operations to job search and confidence building.

Being a CA(SA) with over 25 years of experience as an executive director in both listed and unlisted companies, Clive brings some interesting perspectives in the field of management. Having been involved at director/board level, he can offer a wealth of wisdom on both the people and business front.

Clive is the CEO of Green mind Capital which focuses on assisting executives, especially emerging young CA's, maximize their potential and fast-track their careers. Clive has been involved with coaching and self-development since 1994. He has a particular interest in cognitive awareness technology and has completed a number of advanced courses on the topic.

Clive brings a mix of years of practical executive experience together with his self-development to create a unique method of Transformation Coaching. Clive is also an ORT Jet mentor and works closely with the More To Life program.