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When managed properly, private company executive compensation helps companies attract, keep, and motivate business leaders to achieve corporate objectives and generate financial returns. Many boards and recruiting teams at private companies struggle with the challenge, however, because they fail to consider the total compensation package or link it to desired corporate results.

According to executive recruiting software firm Thrive, opened executive searches grew by 18% in fourth quarter 2020 year-over-year with significant positive momentum swings in nearly all industries tracked. Although overall headcount is not expected to increase in 2021, demand for top performers is growing. To compete effectively for talent with public companies, executive recruiting teams are being challenged to develop more competitive compensation offers.

It is our experience that when executive pay aligns with corporate purpose, values, and strategies better performance is the result. A good private company executive compensation program begins with an organization’s strategic goals and business priorities. These objectives may have changed in the post-pandemic economy as some companies may have realigned their business purpose and strategies.

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Although data about executive compensation at private firms is more difficult to obtain than pay at public companies, a WorldatWork biannual survey finds private firms are behaving more like their public company counterparts. In fact, spending on Short-Term Incentives (STIs) increased at private companies, reflecting 6.5% of operating profit compared to 6.0% in the prior survey. Moreover, an uptick in Long-Term Incentives (LTIs), from 54% to 62%, indicates private companies are taking a more holistic view to incentive management. An update to the survey is expected later this year.

With this data in mind, here are the pay variables and incentives to consider when preparing executive compensation plans:

Fixed Versus Variable Pay

Total compensation is made up of base salary (determined in advance and paid in cash), along with STIs and LTIs. Both types of incentives are variable or at risk and are typically contingent on achievement of organizational or individual goals.

The WorldatWork analysis shows that just under 65% of private company CEO compensation is variable. Reporting executives will have a somewhat higher percentage in fixed pay. When compared to public companies, small-cap companies pay approximately 70% of compensation in the form of variable payments.

Undoubtedly, as organizations reimagine the workplace in 2021 and determine how to adapt to future business needs, they are being challenged to keep up with the pace of change. For companies in transformation with ample resources to invest, greater emphasis should be placed on STIs to achieve short-term goals. Companies with less cash on hand and more focused on sustainability can incorporate LTIs.

Short-Term Incentives

According to the WorldatWork survey, Annual Incentive Plan (AIP) prevalence increased to 86%, which is up from two years earlier. Median target award levels are about 80% of salary for CEOs, although AIP opportunity often varies with industry, company size and appetite for risk. For positions reporting to the CEO, opportunity decreases by about half for each lower position level.

Most STI plans base payouts of performance against pre-established goals. Performance goals are generally derived from the organization’s budget. To a pronounced lesser extent, some companies prefer to base bonuses on after-the-fact assessment of performance.

Private companies typically use one to three performance measures, with profitability the most prevalent and revenue the second. In addition, we are finding a third measure related to Diversity, Equity, and Inclusion (DEI) being incorporated by approximately 25% of private organizations. DEI metrics will accelerate in coming years. The CEO is typically measured on corporate performance, while other executives are measured on both corporate and unit/division/personal performance.

Long-Term Incentives

Just over 6 out of 10 private companies have implemented LTI plans. That is up substantially over the past 12 years when only 35% reported having LTI programs in place.

Private companies offer three categories of long-term plans. Just over a third offer real equity programs, such as stock options, restricted stock units or restricted stock. Many owners are reluctant to part with real stock, however, as it dilutes their ownership. For companies that use real equity, total overhang is generally less than 10%.

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Another option is phantom equity – used by 15% of organizations – including phantom stock and stock appreciation rights. The difficulty with these programs is the timing of reported results due to the lag in determining company values and the black box of valuations. The third alternative is cash-based performance awards used by 65% of organizations.

LTI eligibility is reserved for the CEO and other executives at the top level of the organization. Respondents related that median LTI incentive opportunity for CEOs is between 70% and 90%, falling about 30 percentage points for reporting positions.

Profitability measures are by far the most popular measure with performance plans, followed by a return-on-investment measure and revenue. Performance targets generally flow from budget or are an improvement over prior years. Cash payouts are primarily based on corporate results. Three years is the most common performance period, although it can vary from two to five years.

Summary

The robust economic recovery predicted by many experts will create fierce competition for executives who have proven they can perform under difficult circumstances. Organizations hoping to attract the best and the brightest must be ready with competitive compensation offers.

Copying another organization’s approach leads to suboptimal results. Make sure recruiting strategies and executive compensation packages are reality tested and aligned with corporate objectives.

Contact Us

Would you like to know more about private company executive pay practices or compensation planning for private companies? Please contact Neil Lappley at nlappley@lappley.com or call 847-921-2812.


Changes to executive pay packages during the COVID-19 pandemic have been swift, revealing stark differences in how boards approach compensation for public and privately held companies. Many executives at public companies reliant on annual and long-term incentives (LTIs) are facing significant pay cuts in the wake of dwindling profits with more economic uncertainty ahead. For stable or growing privately held companies, this presents a buying opportunity to attract and capitalize on executive talent with the right compensation strategy.

Executive Pay Practices

Media coverage based on filings and disclosures required for public companies along with say on pay votes ensures most people are familiar with executive pay practices at public companies. This publicity and the large role played by proxy advisors has resulted in a standardization of executive compensation in public companies as no one seems to want to stand out. To play it safe, public companies typically target the market median with stock performance the largest component of pay results.

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Private companies, on the other hand, without the limitations of public exposure can implement more creative pay programs that are crafted to each organization’s unique circumstances. With stock performance a non-factor, other innovative measures including non-financial metrics can play a more meaningful role.

Although pay practices for both public and private companies vary significantly depending upon the industry and type of ownership, all are designed to attract and retain top-notch talent. For private companies, this means making pay sufficient for the quality of executive they are seeking and aligned with the values and goals the organization has established.

However, in our current, challenging business climate, private companies have the distinct advantage of being more flexible, agile, and inclusive than their publicly traded counterparts. In that sense, it may be a golden opportunity to seek where the grass may be greener to upgrade or expand executive ranks.

The Elements of Executive Pay

Public company executive compensation is comprised of three components: base salary, annual or short-term incentives (STIs) and long-term incentives (LTIs). In public companies, incentives dominate executive pay, including annual incentives and long-term, equity-based incentives. Further, in public companies LTIs are the largest component of compensation.

In contrast, private company pay centers on cash compensation, emphasizing base salary and annual incentives. Cash pay is often positioned above the market median, with low or no LTI opportunity. However, this trend is changing as more private companies offer more incentive-based compensation as reported in the Compensation Advisory Board (CAP) and WorldatWork 2019 survey of Incentive Pay Practices.

Executive Pay Components

  Base Salary Annual or Short-Term Incentives Long-Term Incentives
Public Companies 1) 20% of compensation package
2) Some are temporarily reducing base salaries
1) Financial incentives tied to key performance metrics
2) Sustainable Impact measures: Environmental, social and governance
3) Seeing reductions of 25% to 50% of the current plan target opportunity
1) Some adjusting targets on a year-by-year approach
2) Others extending the performance period
Private Companies 1) Stressed
2) One-third to half of compensation
1) Financial measures: profitability and revenue
2) Individual performance common
3) Threshold payment about 50%; maximum payout is 150% to 200% of target opportunity
1) 60% offer LTIs
2) Cash-based plans most common
3) Phantom stock, or real stock vehicles added by minority of companies

Add LTIs to the Pay Mix

Long-term incentives are fast becoming a growing element of executive compensation for private companies. They are essential to attract talent in competition with public companies where LTIs are common. In addition, LTIs play a major role in company retention strategies and to motivate executives to achieve long-term objectives.

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For owners at private companies, they must thoughtfully consider if and how they are willing to share ownership in the enterprise with other executives. In addition, they should consider succession plans and future liquidation or merger opportunities depending on their long-term plans for the business.

A typical sharing percentage range is between 5% -10%. Phantom stock is another vehicle often used, although these programs require sophisticated valuing studies and strong communications support. A final option is a long-term cash plan. This requires solid financial planning and transparency of key financials.

Benchmark for Success

Executive pay has come under increased scrutiny in the current business climate. New attitudes about work and pay practices are being shaped by the pandemic, as well as social and cultural trends in an election year like no other. Executives seeking to make meaningful contributions may find even greater opportunity at private companies embracing innovative strategies and pay practices. Private companies recruiting new talent can cast a wider net and utilize benchmarks for non-traditional sources and their market competitors.

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Still, benchmarking in a rapidly changing business environment can be challenging, making salary projections more obscure. Regardless, the quality of survey data obtained for an executive search must meet high standards. Survey sources should be carefully examined to ensure data cuts are available based on industry and size, which are closely related to the level of executive compensation.

Summary

With less public scrutiny and fewer regulatory hurdles, private companies have more freedom to make proposed changes in creative ways that balance stakeholder interests, improve employee morale and boost the bottom line. Executives at public companies may be ready for a change if an opportunity promises a promotion or broader role or one with more autonomy and more responsibility.

Yes, pay will certainly be an important piece of the equation. However, at a time when job losses in the top ranks may be considerable, enterprising private companies should view this as a recruiting opportunity to build on for the future.

Contact Us

For help or information on this topic, you can email me at nlappley@lappley.com or call (847) 921-2812.