Private companies, unlike their publicly-traded competitors, are privately owned organizations. This means that private corporations are owned by a single individual or a small group of individuals. Public companies, on the other hand, tend to have many different investors who act as shareholders. As a result, private companies often behave and function differently than publicly-traded businesses. One area that presents both challenges and opportunities for privately-owned companies is executive compensation. Indeed, private company executive compensation packages may lack some of the key elements of publicly-traded company packages. So it’s crucial for private companies to understand how to create executive compensation plans that allow them to attract — and retain — their most talented employees within a competitive job market.
Executive Compensation Breakdown
To review, there are several distinct ways that corporations can compensate executives for their work. They include:
- Base salary.
- Equity (stock options).
- Performance-based incentives (both stock and cash).
- Insurance & retirement coverage.
So it’s crucial for private companies to understand how to create executive compensation plans that allow them to attract — and retain — their most talented employees within a competitive job market.
The Executive Pay Gap
According to a recent survey, CEOs at public companies receive around 40% greater compensation than CEOs at private businesses. There are several reasons why this is the case. First, many public companies are simply bigger than their private rivals. The same survey found that public companies have a median revenue of about $5 billion annually, while their private counterparts logged a median annual revenue of just over $1 billion.
The biggest reason why private companies may struggle to compete with public companies in terms of executive compensation, though, is their relative inability to utilize equity. As a general rule, public companies form executive compensation plans that typically include large amounts of stock options. This can include delayed stock or stock awarded upon the completion of previously-agreed objectives. Though public and private companies may offer the same executive a similar base salary, public companies can often offer greater compensation simply because of their ability to issue stock. (Technically speaking, private companies can offer stock as a form of executive compensation too. However, since private companies don’t operate on the stock market, their shares are not “liquid” and are much more difficult to sell. Unsurprisingly, private companies don’t offer equity very often in compensation packages — unless the private business intends to go public.)
Private Company Executive Compensation Strategies
Assuming that a private company doesn’t plan on going public in the near future, business leaders at privately-held businesses need to find ways to generate executive compensation plans that can compete with those of their public competitors. In other words, business leaders must figure out how to pique the interest of talented executives without using equity. Perhaps the simplest way to do this is to offer a greater base salary. Remember that because private businesses don’t have to register with the Securities and Exchange Commission (SEC), they don’t have to publicly disclose executive salary figures. While public companies may be hesitant to give executives large base salaries for fear of public backlash, private companies don’t have to worry about that issue. In this way, private businesses can give their executives more cash-heavy and instantly lucrative deals than some public companies.
What’s more, private businesses don’t have to contend with a board of directors. So private business leaders can negotiate with executives directly to create a bonus structure without having to receive approval from shareholders first.
Of course, some private companies may need to utilize further creative measures to appeal to executives. To do this, they can consider offering insurance and/or retirement packages. Or, they may be able to provide executives with unique perquisites that only their organization can deliver.
Building executive compensation plans that satisfy your most important team members — without breaking the bank — is a delicate practice. And as we’ve shown, it can be particularly difficult for private companies to do this. Thankfully, we can help.
At Blue Herring, we’re experts in the field of executive compensation, and we can help your team create executive compensation packages that fit within your budget and your larger business continuity strategy. We can help you protect your business today and plan with confidence for the future. Contact us today to learn more!