July 01, 2012


Incentive Pay Practices at Private Companies

Private companies face unique incentive compensation challenges. Private companies lack publicly traded equity, so providing competitive long-term incentives can be challenging in terms of valuation, liquidity and ownership structure. Because private companies often do not share the same level of financial information, benchmarking incentives and performance against peers is difficult. However, private companies do have an advantage over their public peers in that they seldom/rarely are subject to the same level of scrutiny, so they have more freedom in incentive pay program design.

Survey Results: Short- and Long-Term Incentives

Of the respondents indicating that their private companies have an STI plan, nearly four out of 10 have one plan, while the rest have two or more STI plans in place. Nearly one-third of the respondents indicate that their companies are planning to add or modify a short-term incentive plan in 2011. The most common reasons for an added or modified STI plan are a change in strategy (50%), improving business results (36%) and a new management team (23%).

The private companies surveyed report modest equity overhang or pools for current and future grants. Seven out of 10 of the respondents with LTI plans in place report equity pools of about 10% or less. This reflects the fact that most private companies do not use real equity for LTI grants. (See graph 6.)