Why Companies Need to Up Their Pay Practice Game

According to Chief Executive’s CEO compensation report, many companies follow best practices for motivating CEOs and other senior executives, but most don’t. Larger private companies, along with private equity- and venture capital-owned companies, as well as employee-owned companies, are likely to follow best practices for pay, but others are lagging behind.

Our survey found that 40% of companies do not have formal long-term incentive plans, and among those that do, a mere 23.5% use performance-based vesting rather than time-based vesting.

This is not consistent with public company practices. Not surprisingly, our survey found that larger companies by revenue behave more like public companies (see chart above). Eighty-five percent of companies with revenues from $250 million to $499.9 million led the pack, followed by 80% for $1 billion companies and 625 for those between $500 million and $999.9 million.

“Public company best practices can and should be applied to private companies.”

In terms of ownership, 80% of employee-owned companies reported formal annual incentive plans, followed by PE-owned (73%) and VC-owned (63%) companies. Other types of ownership, such as sole proprietorships, partnerships and family businesses are far behind the top three.


BEST PRACTICES

Public company best practices can and should be applied to private companies, starting with:

  • Valuing company equity regularly
  • Strong governance and oversight
  • Developing time horizons to measure performance

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