Many private equity-backed companies are not consistently following best practices when remunerating their portfolio company executives, according to a study from research firm Chief Executive Group.
In a study of 1,100 private and public companies, researchers looked at the base salaries, bonuses, benefits and equity compensation packages of chief executives and nine other senior executive positions. They concluded that private equity firms do not pay top-quartile-performing company executives in line with the salaries on offer from venture capitalists and public-sector companies.
However, there was little difference in how private and public company boards pay median-performing company executives.
Wayne Cooper, co-author of the study, said this suggested that many private equity firms were overpaying average performers and underpaying outstanding performers.
“Senior executive compensation and incentive plans are key to attracting, retaining and motivating top talent, yet few private equity firms are properly aligning their portfolio company’s CEO and executive compensation programmes effectively,” said Cooper. “There’s a lot of leverage in getting this right and applying competitive best practices.”
Cooper puts the misalignment down to a lack of formal processes involved when agreeing a portfolio executive’s compensation plan. “Often it is done on an ad hoc deal-by-deal basis, and often times they are not using external benchmarks to make sure the management teams have the right incentives.”
As a minimum, he said, private equity firms need to benchmark their senior management compensation packages against other competitors – whether that's comparable public companies or other private equity-backed businesses.
The report also suggests that many private equity-backed companies only provide the chief executive with an adequate long-term incentive plan. While 88 percent of private equity portfolio companies employ formal annual incentive plans for top portfolio executives, 32 percent do not employ formal long-term incentive plans.
Cooper said the entire senior team should be incentivised in this way. “If only the CEO has long-term incentives, then the interests among the senior management [are] misaligned. All management needs a substantial portion of their compensation tied to long-term incentives,” said Cooper.