PE firms lowballing portfolio exec pay

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. The study found private equity firms do not pay top quartile performing company executives in line with what venture capitalists and public-sector companies offer. However, there was little remuneration difference in how advisors and public company boards pay median-performing company executives.

Wayne Cooper, co-author of the study, said this suggests that many private equity firms are 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 programs 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 when arranging 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.”

He said at a minimum private equity firms need to benchmark their senior management compensation packages with other competitors, be that comparable public companies or other private equity-backed companies.

Cooper adds that this must also be the case for the whole management team. The report suggests that many private equity-backed companies only provide the chief executive with an adequate long-term incentive plan.

The study revealed that while 88 percent of private equity portfolio companies employ formal annual incentive plans for top portfolio executives, 32 percent of these do not employ formal long-term incentive plans.

“If only the CEO has long term incentives, then the interests among the senior management is misaligned. All management needs a substantial portion of their compensation tied to long term incentives,” said Cooper.