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Getting CEO Compensation Right

While the majority of private companies understand the value of incentive-based compensation, most still fail to harness their potential, according to Chief Executive’s recent CEO and Senior Executive Compensation Report for Private Companies.

Incentive-based compensation can play a powerful role in a private company’s competitive strategy, agreed the majority of private company executives participating in a recent Chief Executive survey. Yet, a surprising number of companies lack formal annual incentive plans for executives. Among privately owned companies with between $5 million and $9.9 million in revenue, just 42.6% of participants reported having such a plan. Incentive-based compensation is far more prevalent among larger companies, with a full 81.3% of $1 billion-plus companies tying pay to performance in a formal, structured way.

In addition to company size, type of ownership seems to play a significant role in the use of such programs. Private equity and venture capital-backed companies, which tend to have management with broader operational experience, are more likely to use formal annual incentive-based programs, with 82.8% and 82.4 percent, respectively, having such plans. The figures among sole proprietorships (56.6%), partnerships (54%) and family-owned businesses (65%), are significantly lower.

The bottom line? Smaller firms and those with “homegrown” leadership may be missing out on potent pay-based tools for attracting, retaining and motivating executives. These charts offer additional insights on the pay practices currently in use by today’s private companies, as well as best practice approaches to compensation private sector firms should consider.

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