How To Make Your Private Company Executive Comp Plans More Effective

In today’s environment for private companies, the issue of compensation is often a challenge when trying to attract and retain top talent often due to the lack of equity opportunity and participation. Although this is often seen as insurmountable, private companies should not necessarily look to public companies as “the model” when it comes to compensation design.

If the issue is only about the lack of equity opportunities, there are a number of ways that compensation plans can be designed to mirror and mimic performance triggers and other thresholds available in public companies. These can lead to rewards such as phantom stock, long-term incentives or other substitutes. Using this approach may be successful for some hires, but doing so means quarterbacking a game using someone else’s playbook, and doing that often can be fraught with mistakes.

Rather, we generally recommend that private companies leverage what makes their company—as well as the role—truly special and then reframe the conversation to be about total rewards. This approach offers private companies many levers that can assist in developing a total rewards platform that can compete directly when attracting C-suite talent from public companies as well as other private firms.

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A Different, More Focused Approach

In our work, we start by suggesting that private companies take the opportunity to step back and define themselves in terms of strengths and weaknesses and avoid relying on past definitions. Start with an internal assessment of the culture: What do your employees like about working here, and what do they value? If you often say that no company is just like ours, then list the data points to support that statement and define the unique features of your organization.

Themes can emerge, and they might include statements such as, “I have a direct line of sight, and my effort makes a difference,” “The company’s leaders think and speak in terms of long-term goals and collaboration,” or “The organization is always open to new ideas and suggestions.” Be sure you can validate these points with examples.

Next, we recognize that who owns the company matters. Since not all private companies are created equal, how might the story and opportunity differ based on the ownership structure of the company:

• Owned by one individual – In this scenario, the storyline might differ because pay design and role scope decisions are mostly up to a committee of one. Here, flexibility in developing a role and determining what is to be expected of it may be easier.

• A family business – Do family dynamics or ownership and management structure have a significant impact? This can affect the hiring decisions as well as the scope of a senior role.

• Private-equity owned – Would company trajectory and performance windows differ in this scenario? Where is the company in the transaction cycle? The window for company results might have a much shorter timeline so alignment can be critical.

Before we link a renewed self-definition of the company to the senior executive opportunity, there should be strong consideration of the organization’s outward-facing mission and strategy as well as how that translates to the short- and long-term business plans. The pay and rewards model that ultimately develops raises important questions to consider, including:

• What separates the company from competitors? Is it faster growth, innovation, span of control, speed to market, or speed with decision making?

• What makes an executive at the organization different? Are there systems in place to accelerate growth of the business as well as the individual? Is this apparent to the marketplace and your customers?

When we consult with companies, we stress that all of these factors should relate to and align with a storyline they would use when pitching the company to a new potential client. When recruiting, it is not about what the company does but about what makes it unique as well as what the experience of working at the organization is like.

Pitfalls come when private companies look simply at pay benchmarks that only address the level of pay and do not take into consideration those other elements mentioned above that matter to the work experience and are the true differentiators. More and more we find that compensation alone only really works well when money is the primary driver of the people in the roles. Finding those true drivers is not always so obvious. While a majority of people will cite money because it is an easy reason to articulate for taking or leaving a job, the truth is that other aspects such as impact, acceleration, career and work experience are significant and often more important factors.

Bringing It All Together

Once a company understands its own story, it is time to develop a pay/rewards system that supports and aligns with that story. We always say, “Lead with the story and culture, and then follow with the pay/reward system.” This becomes the basis for recruitment and retention decisions.

For example, a company focused on launching new products may be best served with executives who look for a sense of accomplishment in moving the needle, whether in the strategic planning or execution of that plan. Hiring decisions then become ones based on fit.

One final note: all of the above does not work for every executive. Recruiting and retention decisions should be driven foremost by an objective assessment of each executive’s fit. While some executives will be open to discussions that go beyond pay or equity—and might find new motivators they had not considered—others will keep their eyes fixed on their public-company peers. These individuals might never be a good fit, and an open and honest conversation along those lines might accelerate their inevitable exit as well as the opportunity for the organization to recruit an executive who better aligns with the company.

In Conclusion…

Developing effective executive compensation programs for private companies requires an objective assessment of the strengths and weaknesses of the company and an alignment of the storyline (mission) and the short- and long-term goals with the opportunity being presented. It may not seem obvious, but many private companies already have all of the aspects in place to effectively attract and retain top flight-talent even when competing with public companies.  It can be just a matter of articulating the mission and developing a pay and rewards program that fully supports this narrative.

 

Dan Fries: Dan Fries is Senior Vice President and Managing Director of Sibson Consulting, a national human resources and employee benefits consultancy based in New York City. He has more than 30 years’ experience in helping organizations find the best intersection of business results and people solutions.