How Private Companies Can Lead on Executive Pay

You might think that private companies today would be having a hard time attracting great executives. After all, outside of private equity-owned businesses, private companies don’t give long-term incentives with heaps of stock and options. In other words, in private firms, the upside in compensation for executives is typically limited.

But the reality is that most private companies are doing just fine, thank you. And here’s why: They have freedom to act creatively to package pay with other items of value to fulfill the four purposes of pay design: to attract, retain, motivate, and reward competitively.

Here’s how:

Attracting talent: They tend to offer more cash compensation than many public companies, raising the basic reward/risk ratio right off the bat. On top of that, the absence of Wall Street pressure and meeting quarterly guidance is liberating. The cash pay, along with benefits, company structure, and location, offers a means to differentiate what the private firm has to offer a recruit relative to competitors.

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Retaining talent: They don’t appeal just to pocket books but also to purpose books. Much has been written about people who value work that contributes to society as well as the bottom line. Private companies can more easily foster loyalty by aligning their strategic compass (and compensation metrics) with a societal compass. At one high-performing privately held company, owners have exercised their right to insist on bold initiatives to both turn on values-driven employees and turn up fresh profit.

Motivating talent: By not being under the microscope, private companies have the space to tailor goals and pay talent in ways that meet corporate objectives and appeal to each individual. Healthy base salaries give executives a sense of compensation certainty, and that frees them up to focus on what’s right for the business while not worrying about payouts subject to volatility from stock-price gyrations. What’s more, their boards can creatively structure annual and long-term incentive plans to accommodate situational factors by using such things as unconventional performance periods and performance metrics that benefit from the application of discretion.

Rewarding talent: They have the flexibility to give rewards that recognize unusual efforts and contributions to reward, or accommodate, their talent. They are often more comfortable using judgment, and that can benefit their companies at times when formulas don’t always produce the right outcome. At one privately held company, a board used discretion effectively to motivate and reward executives through a downturn, making sure each executive also shared appropriately in the success of the upswing.

In a highly competitive talent market, big companies might learn a thing or two from their private brethren and rethink what it takes to attract, retain, motivate and reward. As a thought experiment, they could ask this question: How might we redesign pay if our company was private?

Executives do care about certainty, about purpose, about tailored incentives, about recognition and rewards. Boards do value freedom in pay philosophy and incentive design that stress the long term—without causing undue share dilution. Private companies are just as performance-oriented as public ones, but their pay programs reflect broader objectives and the culture they are trying to instill. As one private-company client who competes for top-tier talent told me, “Don’t think about private status as a barrier, but as an advantage.”