Part II: Private Company Compensation Study

Chief Executive Group recently conducted a groundbreaking study of the compensation practices of private companies with revenues of $5 million to $5 billion. In our last issue, we provided some of the highlights about CEO compensation practices. This charticle focuses on some of the key findings related to other senior executives.

The Chairman’s Compensation

We were surprised to see that chairmen who are not also CEOs had higher average and median compensation levels than their peers who are chairmen and CEOs or just CEOs. While we expected chairmen who are not also CEOs to be well compensated due to equity gains (because they are often founders or significant equity stakeholders), we found that they also often enjoy substantial base salaries and bonuses—usually higher than those of the CEO. Chart 1 provides a look at the median salaries by job title across all company sizes, industries and ownership types. Most chairmen, including the 50th percentile, do quite well in terms of cash compensation.

The President’s Pay

We were interested to see that the gap between CEOs and presidents was not that large on a relative basis (less than 25 percent for the median) and that the pay gap between CEOs and other senior executives, such as CFOs, COOs and EVPs, was also less than 50 percent (see chart 1). This is in sharp contrast with the pay gap at public companies, where CEOs often earn five to 10 times that of their direct reports.

As you would expect, there were big differences by company size, industry, type of ownership, level of growth, profitability and other factors that are further detailed in the full report. (See ChiefExecutive.net/CompReport for more information.)

Compensation of Key Executives

Larger private companies tend to have more formal compensation programs, but the majority of private companies do not follow best practices for compensating their key executives. While most private companies do have basic incentives, such as cash bonuses for key executives (See chart 2), only a minority of senior executives at private companies can cite any equity gains last year (See chart 3). This doesn’t mean that the majority of private companies do not have equity incentive plans for their senior executives (In fact, they do). Instead, it suggests that less than half of private companies regularly quantify and communicate the value of equity gains to senior executives. Private companies that manage these equity incentive programs well and leverage their power as a motivator are the exception, rather than the rule.

Benchmarking Benefits

With only a modest investment, private companies could reap enormous benefits from a more professional approach to compensating key executives. Most companies spend a great deal of money on compensation but don’t spend it wisely based on data-driven benchmarks and best practices. For example, many companies do not even benchmark their senior executive compensation packages against other local firms or companies in their industries (See chart 4).