Executive Compensation in 2021: The Most Important Thing Private Companies Should Do Now

If you don't have a formal, long-term incentive program for your executives, it's past time to create one.

If the Covid-19 pandemic has caused unemployment to rise sharply, it has also created unique opportunities for companies to attract top talent that may have not been available before the crisis. Compensation is one of the most strategic tools companies have at their disposal to attract top-notch talent, retain best-performing executives and motivate the leadership team to achieve their objectives. And under the current climate, your talent strategy is critical to your success.

Yet, while most private companies spend a significant amount of money on executive compensation, they are not spending it optimally, according to Chief Executive’s annual compensation research of more than 1,700 companies. For instance, while the best-performing companies use incentive-based compensation, 61 percent of private companies with less than $50 million in revenues and 37 percent of private companies with more than $100 million in revenues (which most would expect to be more “sophisticated”) still do not have formal long-term incentive plans.

Further, more than half of the private companies that participated in the study report not having their company value appraised at regular intervals, meaning their senior executives have no idea what their equity-linked incentives are truly worth.

Having robust compensation plans that account for the current and future environment and that understand the difference between motivating talent to deliver outstanding vs. average performance is crucial to gaining and maintaining a competitive edge. While median base salaries do not fluctuate significantly year over year, variable play and top-quartile numbers play a focal role in the talent acquisition-retention game, particularly for companies with more than $100 million in revenues.

The same is true of companies in certain industries, such as Real Estate and Tech, where the bonus alone accounted for nearly half of the cash compensation in 2019.

What to do if you’re a family business or someone who can’t offer long-term equity? A few suggestions:

• Be more generous on salaries and long-term bonuses.

• Come up with long-term incentive program alternatives to equity, such as synthetic equity. In this case, you can approximate stock, a stock plan or an option plan.

• Mix in short and long-term bonuses plans based on performance.

The most important rule: Whatever you do, make sure your plan aligns with the long-term goals of the company. And make sure you’re loud and clear in communicating the value—whatever it is—to your team.

More detailed information about compensation packages for CEOs and nine other senior executive positions, their base salaries, bonuses, equity grants and gains, benefits, perks and company compensation policies and practices, as well as how these elements vary by title, company size, industry, ownership type, geographic region and other key variables, is available in Chief Executive’s 2020-21 CEO & Senior Executive Compensation Report for Private Companies.

For additional information about the report, contact Chief Executive’s research director, Melanie Nolen, at mnolen@ChiefExecutiveGroup.com.

Melanie C. Nolen
Melanie is research editor for Corporate Board Member and Chief Executive. She has two decades of experience writing for the corporate and financial industry across Canada and the United States. She is based in Nashville, Tennessee.