CAP analyzed executive compensation practices at companies with recent IPOs from 2023 to 2025. The data shows a clear public company transition: cash generally increases, formal bonus programs become more prevalent, and equity grants become a larger part of the compensation mix. This report also examines equity share pool design, including pool size and value, other equity practices and the typical allocation to senior executives. Majority of IPOs tend to cluster in a couple of industries. CAP’s study is cross-industry, though approximately 80% of the sample represents the technology or biotechnology/pharmaceutical industries (45% and 36% respectively).

At a Glance

An IPO changes more than just a company’s ownership and capital structure. It also introduces public company governance and shareholder expectations that affect both pay levels and program design. CAP’s review shows that the transition from pre-IPO to post-IPO is visible in the changes to cash compensation, equity mix, formalization of incentive programs, and the equity pool design that supports ongoing compensation programs.

• Pay levels rise. Median base salary for CEOs increases 5% and median CFO salary rises 7%, while long-term incentives triple in value
• Formal annual incentive (or bonus) programs become more prevalent
• Pay mix shifts increasingly toward equity and long-term incentives, increasing to about 50% of mix, from about 35% pre-IPO, on average
• Share pools are a major component of compensation-related IPO planning. The median pool is about 15 million shares; 89% of new plans include an evergreen provision
• 77% of companies implemented an Employee Stock Purchase Plan (ESPP) at time of IPO

How Pay Levels Change after an IPO

The move to public company compensation is accompanied by higher pay, but the magnitude for each element differs across industries.

Base Salary

CEO and CFO base salary increases for the total sample were similar in the mid- to high-single digits. For CEOs, median increase is 5% post-IPO; for CFOs, the median is 7%. Among constant incumbents in the technology sector, at median, base salaries were flat.

Annual Incentive Opportunity

Median bonus opportunity for CEOs nearly doubles post-IPO, while CFOs see a more modest increase in target bonus as a percent of salary. Technology executives tend to have higher opportunities than their counterparts in biotechnology/pharmaceuticals.

Long-Term Incentive Opportunity

For CEOs, the median actual long-term incentive values increase by 262% from pre-IPO levels; for CFOs, median increases by slightly less but is still significant (+230%). As public company compensation plans are formalized, long-term incentive values become the largest portion of executive pay as the cost to companies of providing long-term incentives goes down given access to equity.

Total Direct Compensation

Overall, when looking at total direct compensation, CEO and CFO compensation significantly increases from pre-IPO levels.

Annual Incentive Programs Become More Defined

Pre-IPO annual incentive (or bonus) programs are often highly discretionary. They may consider financial performance but often do not have formal metrics or weightings and may be largely determined based on individual performance. As companies evolve towards and through an IPO, we see companies begin to formalize the bonus program. Investor expectations are that bonus programs are tied to financial performance with clear target goals. The first step to formalizing a bonus program is ensuring that participants have individual targets. From there, depending on the ability to forecast and set goals, companies typically start with selecting key financial performance metrics and ultimately evolve to a clearly defined program with threshold, target, and maximum financial goals. About a third of companies in our sample did not have a formal annual incentive program pre-IPO and formalized it in the year after going public.

Corporate performance remains the foundation of formal short-term incentive programs. Post-IPO, all companies in our sample had a corporate component, with about half of them also incorporating individual performance.

Pay Mix Shifts Toward Long-Term Incentives (Equity)

The public company transition changes not only how much executives are paid but also how compensation is delivered. Across the total sample, long-term incentives become a larger portion of actual pay after IPO.

The long-term incentive vehicles used varies across companies. Most recent IPO companies use time-based vehicles, either stock options or time-based restricted stock/stock units (RS/RSUs). This also aligns with the most common vehicles used pre-IPO. As companies continue to evolve into more mature public companies, the expectation from institutional investors and proxy advisors is that a performance-based vehicle is introduced into the mix, balanced with time-based vehicles. Our sample saw limited instances of a performance-based vehicle right after IPO, but that prevalence increases as companies move further away from IPO.

Founder-Led Status Impacts Compensation

About 70% of companies in CAP’s sample were led by founders at the time of IPO. Founder ownership levels remained relatively steady pre- and post-IPO, with technology CEOs holding about 30% of outstanding equity. For other industries, ownership is around 10%. Boards and Compensation Committees need to determine philosophically if higher ownership levels should be considered when setting pay. One approach is to minimize equity grants given high existing ownership and alignment with shareholders, while another approach is to set market-competitive pay irrespective of ownership level. We often see mix of pay differ between founders and non-founders, even when total compensation levels on a dollar-basis are similar.

Founder-led companies can have unconventional pay mixes, including exceptionally low annual equity compensation or unusually high concentrations in one pay element. Overall, founder CEOs tend to have a slightly heavier weighting on cash compensation than non-founders, though for both groups, we see about 50% in the long-term incentives on a go-forward basis in our sample.

Share Pool Size and Equity Plan Design is One of the Biggest Decision Points

Long-term incentive plan design is one of the biggest compensation decisions made during the IPO process. The size of the equity pool (and related plan features) determines the ability to make initial transition-related grants, support ongoing annual equity programs, and recruit future talent.

The initial share pool, at median, for our sample was around 15 million shares, with median total potential dilution of around 15%. Size of the pool can vary across industries – we see higher initial pools in technology where equity can be an important compensation tool organization-wide, with slightly smaller pools in the biotechnology/pharmaceutical industry. Regardless of the absolute number of shares, we typically see dilution in the range of 10% – 15%+, with more mature companies having lower dilution and earlier-stage companies that rely more heavily on equity as a compensation tool to have dilution ranging up to 20%.

As the first long-term incentive plan is drafted at the time of IPO and therefore is not shareholder approved, we often see less shareholder friendly practices including evergreen provisions and liberal share recycling. It is also common to implement an employee stock purchase plan (ESPP) at the time of IPO.

Once a company goes public, any material changes to the equity plan document, including increasing the total pool, are required to be shareholder approved. Evergreen provisions automatically increase the size of the equity pool each year. The typical evergreen provision is around 5% per year, though boards typically retain the discretion to reduce this amount. Sometimes companies use a “lesser of” approach that considers a fixed absolute number of shares versus a fixed percentage to increase the pool by.

Liberal share recycling is another common pre-public practice that helps conserve the number of shares. While all plans permit returning shares to the pool upon forfeit, liberal share recycling can be when shares withheld for taxes or tendered at an option exercise are returned to the pool. This can lead to further dilution of shareholders without them being aware. We typically see these two provisions removed when a company puts their equity plan up for shareholder approval the first time.

An employee stock purchase plan, or ESPP, allows employees to purchase shares through payroll, often at a discount to the current stock price. This practice supports retention and engagement and broadens equity participation for employees that may not be in the annual equity program.

We often see companies grant initial equity awards to executives right before or in conjunction with the IPO. These awards are often larger than typical annual equity awards and designed to retain executives through the newly public company period. Median CEO grant is around 4% of the total pool, though higher for technology companies and slightly lower for biotechnology/pharmaceutical companies. For CFOs, this is around 1% – 1.5% of the total pool. These awards often can use a large portion of the initial share pool. In our sample, we had few examples of special awards, and those tended to be for other executives given the high prevalence of founders in our sample.

Top Considerations for Companies Preparing to Go Public

Executive compensation when going public is shaped by two primary forces: 1) the additional responsibility and oversight inherent in leading a public company and 2) external expectations from proxy advisors and institutional investors regarding compensation program design. There is an understanding that the transition and evolution of the executive compensation program happens over time, though the time period for this varies based on your investor base. There are several considerations during the transition:

• Establish a core compensation program: Develop a peer group, set executive pay aligned to public company peer group, formalize annual incentive program and determine long-term incentive program
• Make decisions that set the company up for success over a multi-year period: Establish framework for continued evolution and progression toward public company pay and governance, determine size of equity pool needed to support multiple years of grants, and determine how compensation tools such as equity are used throughout the organization
• Assess post-IPO ownership and understand your investor base: If founders still retain significant ownership or there is a controlling shareholder, companies may feel less pressure than other newly public companies to ramp up governance expectations such as stock ownership guidelines or adding a performance-based long-term incentive plan
• Understand your filing status and how that impacts compensation disclosures: The SEC has a proposal outstanding that will greatly simplify disclosure requirements for newly public companies; however, it is not just about a CD&A, there are currently other requirements such as say-on-pay, CEO pay ratio and pay versus performance disclosure. It is important to understand when you will become subject to these, and the phase-in period so that you are prepared come proxy season and are not scrambling
• Understand how decision-making impacts disclosure: It is not just special awards, any and all parts of the decision-making process (setting targets, determining bonus outcomes, etc.) will need to be disclosed. Make sure your board understands disclosure implications of decisions going forward.

Going public is an exciting time for companies, but there are a lot of implications for executive compensation. Beginning to think about the necessary changes 12-18 months ahead of going public will make the transition significantly easier, rather than trying to take care of compensation as an afterthought.

For questions or more information, please contact:

Joanna Czyzewski
Partner
[email protected]
646-486-9746

Chris Callegari
Senior Associate
[email protected]
646-486-9747

Bhavika Podduturi provided research assistance for this report.

Research Sample

CAP’s analysis covers 44 companies across industries. See below for financial statistics.

Introduction

Board members at privately held and family-owned companies play an important role in governance and oversight and should be appropriately compensated for their contributions and efforts. However, the appropriate amount of compensation is difficult to determine because of the lack of available market data on private company board pay. To address this data deficiency, Compensation Advisory Partners (CAP) and Private Company Director and Family Business magazines conduct our annual survey of private company board compensation and governance.

The new 2025 sixth edition of the survey report covers a robust dataset of 633 respondents that certified their data in April 2025 and provides an up-to-date analysis of director pay practices that reflects the current competitive environment. New questions about family and owners’ councils were added to the 2025 survey to capture the additional governance forums specific to family businesses. Year-over-year comparisons are made in this report with respect to the 2024 survey results.

For the purpose of analyzing the compensation data elements, only companies that provide the compensation element were included. Some companies that do not offer a particular compensation element provided “zero” as the answer for that pay element. Zeros were omitted in the analysis of pay levels for components of pay. However, companies not offering a particular compensation element are reflected in the prevalence data. The effective date for the data is April 2025.

Summary Report

The full report for the 2025 Private Company Board Compensation and Governance Survey with detailed results is provided to survey participants only. This executive summary report covers high-level findings. Please contact CAP to participate in the 2026 edition of the survey to access the full results with data by revenue size, industry and company type, or if you are interested in a compensation assessment based on the survey data.

About the Survey Participants

The survey respondents represent companies in diverse industries and span a variety of sizes as measured by revenue. Exhibit 1 shows the distribution of responses across revenue ranges. The average revenue across the entire survey sample is $138 million. However, the large number of respondents means that we have robust data samples across all revenue ranges.

The top three industries represented in the survey are manufacturing (26% prevalence), professional, scientific and technical services (16%), and finance and insurance (11%).

Of the participating companies, 50 percent are wholly or majority family-owned or controlled. The survey also drew participation from companies that are closely held, private equity-owned, and owned by employees through employee stock ownership plans (ESOPs). The business structures represented include S corporations, C corporations, limited liability companies (LLCs), partnerships, and other structures (see Exhibit 2).

Most participants are based in the United States, but the survey drew responses from all over the world. Of the respondents, 74 percent have fiduciary boards, while the remainder have advisory boards. Compensation for directors on advisory boards is typically 65 percent to 75 percent of the compensation for directors on fiduciary boards, given less risk and legal obligations with advisory boards.

Compensation Components

As private company board governance continues to evolve, the complexity and time commitment associated with board service has increased because of a broader mandate of work being expected of board members. The additional responsibilities, coupled with greater competition to recruit qualified candidates and an inflationary economic environment, resulted in a 25 percent increase in median total compensation per director from 2024.

Table 1 summarizes board compensation levels for the total sample if the participant reported data for that element.

Table 1

Median Private Company Board Compensation Levels (Total Sample)

Notes: Data reflect the median of all companies reporting data for each pay component. Median figures are not additive because of the varying prevalence of each pay component.

Total compensation includes annual board cash retainer, meeting fees (board and committee), leadership premiums, committee leadership and membership retainers, and long-term incentives for non-employee directors.

The double-digit increase in total director compensation from 2024 to 2025 can be attributed to the following factors:

• Increased prevalence of annual board retainers (77% vs. 75% in 2024) and the corresponding reduction in per-meeting fees (38% vs. 45% in 2024). Companies are consolidating meeting fees into a single annual retainer.
• Increased prevalence of long-term incentives across the entire survey sample (37% vs. 28% in 2024). This is a trend that CAP has been predicting, and we are finally seeing evidence of it in the data set.
• Increased workload for directors. The number of directors working more than 100 hours per year increased by 18 percent in 2025.

Annual Retainer

Of survey respondents, 90 percent provide some form of compensation to directors. Annual board service cash retainers are the most prevalent component, paid by 77 percent of respondents. In addition, more than half of companies (54%) now use annual retainers as their only form of cash compensation. Board retainers are highly correlated with company size as shown in Exhibit 3.

Meeting Fees

Meeting fees continue to be used by private companies – particularly family businesses – but are declining in prevalence. Of the private companies surveyed, 15 percent use meeting fees as their only form of cash compensation. As with retainers, meeting fees increase with company size (see Exhibit 4).

Long-Term Incentives

The prevalence of long-term incentives (LTI) for private company board service increased significantly, with 37 percent of respondents now offering LTI to directors. LTI use is growing in prevalence as private companies compete with public companies for director talent, and over 90 percent of public companies grant equity to directors.

Of the private companies offering LTI to directors, stock options and restricted stock/units (“real equity”) are the favored vehicles. Several respondents reported the use of cash bonuses tied to annual performance metrics, which CAP has classified as LTI in the survey. Typical practices for private company LTI awards are to grant either annually (54%) or when the director is appointed to the board (44%), and to have awards subject to vesting. Given the multiple time frames that awards cover, LTI grant values vary significantly. The total sample median award value is $50,000, which is a combination of the grant date value of annual, ad hoc, periodic, and one-time/front-loaded grants.

The use of LTI indicates that private companies are working to retain and align board members with the company’s overall success. CAP expects the use of performance-based pay for directors to continue to increase over time, especially at larger private companies, because of competition for specialized board talent with public companies.

Other Key Pay Practices

Compensation to Family Members

Of the participants, 47% provide compensation to shareholders and family members who serve on the board. The decision to compensate shareholders and family members is a philosophical one; for some companies, the rationale for not paying directors is due to such directors already benefitting from the company through shareholder distributions or employment. Other companies believe in the importance of recognizing contributions, skills, and time for all directors, regardless of family or shareholder status. For these companies that compensate shareholders and family members, more than 70 percent compensate them on the same basis as the independent directors.

Board Leadership Retainer

Approximately 40 percent of private companies provide additional compensation for board leadership roles. When the incremental leadership retainers are considered as a multiple of regular board member retainers, the median multiple is 0.64x for the incremental board chair retainer, a level that has remained stable over time. The median multiple is 0.42x for the incremental lead director retainer.

Committee Retainers

About 40 percent of private companies provide additional compensation for committee chairs with an incremental retainer of $6,000 at median. Most companies do not differentiate pay between types of committees.

Committees have become more prevalent at privately held companies, with 68% of survey respondents reporting they have formal committees. The three main committees reported are Audit and Compensation (both with 86% of respondents), and Nominating/Governance (67%). Typically, each director serves on one or two committees as a requirement of board service.

Summary of Board Pay Models

As shown in Table 2, private companies use different pay models to compensate directors. The annual cash retainer only model (either with or without LTI awards) is gaining in popularity (54% of respondents), as it is simple to administer and is similar to the approach used by publicly traded companies.

Governance Findings

In addition to benchmarking compensation levels and practices, the survey covers governance issues, including board size and composition, independence, workload, term limits and diversity.

Board Size and Composition

Typical private company board size ranges from five to eight directors, with a median of seven directors. The median size is unchanged from the 2024 survey.

Board composition for 2025 continues to be half inside directors and half independent/outside directors.

Number of Board Meetings and Workload

For 2025, private company boards report holding an average of four in-person meetings and two virtual meetings, which is unchanged from 2024. The reported annual time commitment to perform the basic board duties has increased in 2025. One-third of respondents spend 51 to 100 hours on board work each year, with another 21 percent spending more than 100 hours on board work. Committee work typically adds an additional 10 to 20 hours to annual board work.

Board Chair

Many companies separate the board chair and chief executive officer (CEO) roles: Of the private company survey respondents, 31 percent have a board chair who is an outside director, and 30 percent have a lead independent director, compared with 51 percent and 37 percent, respectively, for micro-cap public companies. Corporate governance best practices call for increased use of independent board leadership.

Board Diversity

Two-thirds of the survey respondents indicate that diversity is somewhat to extremely important for their board composition. Exhibit 5 shows the reported importance of board diversity compared to previous iterations of this survey. Private companies often recruit board members for particular knowledge or experience, or to fulfill specific company needs. As a result, gender and ethnic diversity have not had the same level of focus for board recruitment as at publicly traded counterparts.

Privately held companies increased representation by women and minority directors in the past year. The 2025 survey found that 76 percent of private company boards have female directors, and 32 percent have Black, Asian, Latino or multiracial directors. As shown in Exhibit 6, women remain underrepresented in board leadership roles. However, women in leadership roles have increased since 2024.

Other governance findings are limited to survey participants.

Board Effectiveness

Privately held companies create boards to provide a structure of accountability and sound governance, and because boards provide benefits and competitive advantages. Directors bring specialized skills and expertise to the company, serve as sounding boards and advisors to owners and management, provide unique perspectives and ideas, and leverage their professional networks on behalf of the company. At times, directors also assist with transactions and special situations.

The survey asked respondents about the effectiveness of their boards. As shown in Exhibit 7, respondents overwhelmingly reported that their boards are effective, with 87 percent rating them as effective to extremely effective.

The survey asked respondents about ways to improve board effectiveness and the board’s biggest impact on the company. The top two ways to enhance board effectiveness are to add board members with specific expertise (e.g., industry, operations, finance, etc.) and to increase interactions between management and the board. The biggest impacts of private company boards are serving as a sounding board for management, especially on developing business strategy, and providing enhanced corporate governance for the company.

Family and Owners Councils

The 2025 survey gathered data for family and owners councils for the first time, to better capture the scope of governance forums at family companies. Family (or owners) councils are the primary forum for communication and education of the family for the purpose of sustaining engagement in the business.

Among family business respondents to the survey, 46 percent reported having a formal structure for family governance. Of companies with a family council, 23 percent pay the leader and 20 percent pay members. Thirty-six percent of family councils have an established budget. We expect family governance responses to be more robust in future survey iterations.

Looking Ahead

Private companies have really “upped their game” in director compensation and corporate governance practices this year. As the evolution of private company governance continues, CAP expects further change given the ongoing tight talent market where both public and private companies are competing for the same group of qualified director candidates. The overlap in the market for talent is causing pressure on private companies to increase pay levels and to be more creative in their pay structures to support their recruitment efforts. Once privately held and family-owned companies attract directors who have the right skills and cultural fit required by the company, they want to reward and retain them with properly structured director compensation packages.

CAP expects to see an increased emphasis on performance-based pay in the form of annual bonuses or long-term incentives (either real stock or cash-based) to align board compensation with shareholder interests and company performance over a director’s tenure. We also expect continued increases in overall compensation, including annual retainers and average pay per director, given the greater time commitment and expectations placed on board members. Like public companies, private companies are expected to shift to the annual retainer model and diminish the use of meeting fees, which create an administrative burden. Bundling pay for all board activities in the form of an annual cash retainer is a simpler way to compensate overall time and effort and is easier to administer. Further, not all board work is done in formal meetings, so retainers better reflect the ongoing interactions between the board and company management.

Survey Contacts

The full survey results are free but limited to participants. Please contact either CAP or the survey director if you are interested in participating in the 2026 survey, and contact CAP if you are interested in a compensation assessment based on the survey data.

Survey Director

David Shaw Publishing Director of Directors & Boards and Private Company Director [email protected]

Survey Authors from Compensation Advisory Partners

Susan Schroeder Partner [email protected]

Bonnie Schindler Partner [email protected]

Louisa Heywood Associate [email protected]

Four-Part Survey on Short-Term and Long-Term Incentive Pay Practices at Public, Private, Nonprofit and Government Organizations.

Changes to short-term incentives (STIs) prompted by the global pandemic/economy are largely temporary, and some organizations cite the pandemic as the reason for modifying long-term incentives (LTIs). These findings are captured in the “2021 Incentive Pay Practices Study” of publicly traded, privately held, nonprofit, and government organizations conducted by Compensation Advisory Partners (CAP) in partnership with WorldatWork. The four-part survey provides a sweeping overview of approaches to incentive pay, including types of STI plans; annual incentive plan (AIP) measures, eligibility, targets, and payout frequency; long-term incentive (LTI) prevalence; incentive plan budgets (actual and estimated); and more.

Sample Findings

Publicly Traded Companies

• 34% of public companies added or modified their STI plans for 2021 with 26% of the changes due to the global pandemic/economy, and of those changes, 83% are temporary.
• 92% of public companies grant LTIs on an annual basis, and 66% vest LTI awards over three years.
• 13% of public companies identify diversity, equity and inclusion (DEI) initiatives as one of their STI performance measures to determine AIP payouts, in addition to financial, individual, and operational measures.

Privately Held Companies

• 37% of privately held companies added or modified their STI plans for 2021 with 29% of the changes due to the global pandemic/economy, and of those changes, 82% are temporary.
• Use of LTIs is down at private companies: 51% in 2021, down from norms in the low 60% range since 2013.

Nonprofits

• Short-term incentive prevalence at nonprofits increased in 2021 to 82%, the highest level reported in this survey’s history.
• Nonprofits, including large institutions, place less emphasis on profitability performance measures than for-profits, 46% compared to 72% (publicly traded companies) and 74% (private companies).
• About one-fifth (18%) of nonprofits have LTIs, compared to 94% of publicly traded companies and 51% of private companies.

Government Organizations

• STI use at government organizations reached 58% in 2021, up from 44% in 2019.
• Government organizations that offer LTIs (10%) do so through nonqualified deferred compensation programs.

“We’ve done this survey since 2007, and with each iteration we’ve seen incentives become more prevalent and offered to a broader range of employees,” said Bonnie Schindler, CECP and a principal at CAP. “Organizations are spending more on this component of compensation, and we expect to see incentives continue to be emphasized into the foreseeable future to align pay with performance.”

“It’s a white-hot labor market, and employers are struggling to find, engage and retain top-performing employees,” said Sue Holloway CCP, CECP, Director, Executive Compensation Strategy, WorldatWork. “It behooves every employer—public, private, nonprofit, and government alike—to get up to speed quickly and benchmark their incentive plans against all sectors because job candidates are gauging them to help determine their next career move.”

Methodology

WorldatWork collected survey data for the four-part survey during an 18-day period starting 3/4/21. The survey report is based on 1,226 responses across the four sectors: publicly traded; privately held; nonprofit; and government organizations. The demographics of the survey sample and the respondents are similar to the WorldatWork membership as a whole. The typical WorldatWork member works at the managerial level or higher in the headquarters of a large company in North America.

The full results of the Incentive Pay Practices surveys are available to WorldatWork members at Incentive Pay Practices (worldatwork.org)

For questions or more information, please contact:

Bonnie Schindler
Principal
[email protected]
847-636-8919

Susan Schroeder
Partner
[email protected]
310-426-2340

This report is a summary analysis of a joint study by Compensation Advisory Partners, Family Business and Private Company Director magazines.

Summary Report

Compensation Advisory Partners (CAP) and MLR Media launched the first-ever Family Business Executive Compensation Survey in 2020. CAP, an independent executive compensation consulting firm, and MLR Media, the publisher of Family Business Magazine, launched the survey to collect data on the executive compensation levels at family companies and to understand the pay practices unique to these businesses. The survey drew responses from more than 300 family-owned businesses representing a broad range of revenue sizes and industries.

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Key survey findings include:

• The top executive positions of Chief Executive Officer (CEO) and President are held predominately by family members. In contrast, specialized functional roles, such as Chief Financial Officer and Chief Legal Officer, tend to be held by non-family members.
• Among the survey respondents, the CEO position is most often held by a family member across all company revenue ranges – even at companies with greater than $500 million in revenue.
• Compensation programs do not vary between family and non-family members at most survey respondents. The majority of companies offer participation in short- and long-term incentive programs to both family and non-family executives. Greater differentiation occurs for long-term incentives because family executives often hold equity ownership in the business, which provides profit-based distributions and dividends.
• Family-owned businesses spend a median of 10 percent of operating income on short-term incentives, which is higher than the spend at other privately held companies. Short-term incentive payments are most often based on company profitability. Beyond profitability, the performance measures used by family companies vary widely. The second most common performance measure is individual performance, indicating that subjectivity plays a role in short-term incentives at many family businesses.
• Long-term incentives are offered by approximately half of the family-owned companies surveyed. The most common long-term incentive vehicles are cash-based performance plans and phantom stock plans.
• The survey asked about dividends to shareholders to understand potential income to family executives who hold equity ownership. Dividends are paid to shareholders at 70 percent of survey respondents. Dividends paid in 2019 were 14.4 percent of net income at median. Given the impact of COVID-19, dividends were estimated to be lower in 2020, at 10 percent of net income at median.
• About one-third of the family businesses surveyed took executive compensation actions in response to COVID-19. The most common action was to suspend salary increases and bonus payouts. Another common human capital action was to reduce the workforce either permanently or through temporary furloughs.

About The Survey Participants

More than 300 companies responded to the survey, representing a broad range of industries and revenue sizes. Manufacturing is the most prevalent industry in the survey (one-third of respondents), followed by real estate and rental and leasing; agriculture, forestry, fishing, and hunting; construction; wholesale trade; and retail trade.

Participating companies span all different sizes. Exhibit 1 shows the distribution of responses across different revenue ranges.

The survey drew participation from companies with one to more than six generations of active family ownership. Exhibit 2 shows the distribution of revenue across generations. (Generations 4, 5 and 6+ are aggregated in the exhibit.) Not surprisingly, mature family businesses that have been in operation for many generations tend to have higher revenue, as Exhibit 2 illustrates.

Approximately 75 percent of participating companies are S or C corporations. Ninety-five percent of participating companies are based in the United States and Canada. All survey results are denominated in U.S. dollars.

Compensation Practices

The survey asked participants to provide compensation data (salary, short-term incentives, and long-term incentives) for 10 executive positions. Median compensation data for the total sample are shown in Exhibit 3. (The detailed report for survey participants includes data for each component of compensation, and also shows compensation data by revenue range).

Company size is correlated with the level of executive pay at family businesses, as shown in Exhibit 4. As a company’s revenue increases, the complexity of operations and the responsibilities of the executives also increase, necessitating higher pay to attract and retain executive talent.

Family and Non-Family Executives

The survey asked respondents to indicate whether a position was held by a family member or not when providing compensation information. As shown in Exhibit 5, the two executive positions of CEO and President tend to be held by family members. In contrast, specialized functional roles tend to be held by non-family members. In addition, as shown in Exhibit 5, smaller companies have greater family representation in the executive ranks than larger companies. The results are not surprising: Smaller companies tend to rely on family member “sweat equity.” As companies grow, they hire talent from outside the family, particularly to gain specialized functional expertise. One surprising result is that the CEO position is held by a family member across all revenue ranges – even at companies with greater than $500 million in revenue.

Given the predominance of either family or non-family members holding a specific role, differences in total compensation for family and non-family executives cannot be meaningfully measured, except for select positions.

The President position and Chief Operating Officer (COO) position have more even distributions of family and non-family incumbents in the roles than other survey positions. To help control for company size, the two positions were analyzed by looking at pay for the President and COO roles as a percentage of CEO compensation in the same company.

• President: Base salaries for both family and non-family Presidents are about 95 percent of the CEO’s salary at median. The family President earns up to 15% less in total compensation than the non-family President. In fact, a non-family President’s total compensation exceeds that of the CEO at several family-owned companies responding to the survey. These findings indicate that family businesses that hire non-family Presidents view these incumbents as similar in value to the CEO. One explanation is that family businesses hire Presidents for succession-planning purposes to prepare a non-family member to eventually take over the top position.
• Chief Operating Officer: In contrast to the President position, family members in the COO role typically earn up to 15% more in base salary and total compensation than non-family members in the same role. A potential explanation is that families strive for greater pay equity between family members on the executive team.

The survey asked respondents whether family and non-family members were treated the same when receiving short- and long-term incentives. The majority of companies offer participation in short- and long-term incentive programs to both family and non-family executives.

There is more differentiation in participation for long-term incentives for family member executives, which is not surprising since family members are more likely to be shareholders and, therefore, be eligible for dividends or profit distributions. Long-term incentives are more likely used for non-family members to attract and retain talent, and to align the executives with company and shareholder objectives.

Short-Term Incentives

Short-term incentives are an important tool for rewarding performance and focusing executives on the near-term objectives of the business. The respondents provided their companies’ approximate budgets for short-term incentives as a percentage of operating income. At median, short-term incentive spending was 10 percent of operating income.

CAP has assessed short-term incentive spending as a percentage of operating income at privately held companies over the past decade. Privately held companies have historically spent 6 percent to 6.5 percent of operating income on short-term incentives at median. With a higher spend relative to other private companies, family companies emphasize short-term incentives as an important way to motivate and reward executives and employees.

The survey respondents report using a broad array of performance measures to determine payouts. More than half of the respondents use a profitability measure in determining short-term incentive payouts. Beyond profitability, no other performance measure stands out as a prevalent practice. Exhibit 6 below shows the top five most prevalent performance metrics at family businesses.

After profitability, individual performance is the next most common performance factor, which indicates that subjectivity plays a role in short-term incentive decisions. Other common metrics are operational objectives, revenue, and strategic objectives. The broad array of performance measures favored by family businesses indicate that they assess their performance more holistically than privately held and publicly traded peers, which strongly emphasize profitability and financial performance in their short-term incentive programs.

Long-Term Incentives

Long-term incentives are granted to attract and retain executives and focus them on sustainable value creation and maintenance of the long-term health of the business. Long-term incentives, such as restricted stock, stock options and long-term cash incentive plans, are widely known because of their use at public companies and the significant values they can deliver.

At publicly traded companies, long-term incentives are almost universally offered to top executives. In contrast, privately held companies do not have liquid stock with daily valuations that they can use as executive incentives. Given this limitation, the prevalence of long-term incentives is approximately 60 percent in privately held companies. In addition to the long-term incentives mentioned above, privately held companies offer phantom equity, stock appreciation rights (i.e., phantom stock options), profit interests and deferred compensation.

The prevalence of long-term incentives at family-owned companies is less than that of other privately held companies. Only half of the family businesses surveyed offer long-term incentives to executives (see Exhibit 7). The prevalence is lower than at other privately held companies because family businesses are often reluctant to share real ownership or economic value with executives outside the family.

Exhibit 8 below shows the top 3 most prevalent long-term incentive vehicles at family-owned companies. These companies predominately favor cash-based vehicles.

In the family businesses that have long-term incentive programs, the most common practices are to grant awards annually, and to have vesting or performance periods spanning three or five years.

Without a public market to provide liquidity or a valuation for equity, private companies must decide on how to provide these features in their plans. To value equity, family businesses typically use an established formula or an outside, independent appraisal. These companies typically provide liquidity upon an executive’s termination or upon vesting of the award.

The companies surveyed report modest pools for the sharing of value creation relative to publicly traded peers. More than half of the respondents with equity-based long-term incentive plans report pools of 10 percent or less of total shares outstanding.

Dividend Practices

The survey asked family businesses about their dividend payment practices to understand the income potential for executive shareholders. Of the survey respondents, 70 percent pay dividends to shareholders (see Exhibit 9).

In 2019, companies paid out 14.4 percent of net income at median to shareholders. Given the impact of the COVID-19 pandemic, companies anticipate paying smaller dividends in 2020.

Larger Family Businesses (Greater than $500 Million in Revenue)

Competing with publicly traded companies for executive talent is a particular concern for large family businesses. In reviewing the survey responses of companies with greater than $500 million in revenue, a few distinctive compensation practices emerge:

• Higher pay positioning – Larger businesses tend to have an above-median pay positioning for base salary and total compensation compared to smaller counterparts. This higher positioning for total compensation is achieved, in part, by short-term and long-term incentives.
• Short-term incentives – Larger businesses provide higher maximum short-term incentive opportunities (150 percent to 200 percent of target) and budget a higher percentage of operating income for short-term incentives.
• Long-term incentives – Over three-quarters of larger family businesses offer long-term incentives to their executives. Long-term incentives are typically granted annually, and the grants are limited to the senior executive group.
• Budgeted salary increases – While smaller organizations tend to have a wider range of annual budgeted salary increases, larger companies’ budgeted increases center around three percent.

The Impact of COVID-19

Participants were asked to provide information about any actions taken in response to COVID-19. Approximately one-third of the respondents indicated that they took executive compensation actions because of the pandemic. Of the respondents that reported broader COVID-related actions, the most common were:

• Suspended pay raises or bonus payouts (46%)
• Reduction in workforce (40%)
• Furlough of employees (32%)
• Reduced base salary (30%)
• Suspended or reduced dividend payments (24%)

The most common durations of the COVID-related actions are indefinite/to be determined (31% of companies), the duration of the pandemic (22%) and through the end of 2020 (21%).

Looking Ahead

COVID-19 made 2020 a challenging and unprecedented year. As a result of the pandemic, companies had to modify their business strategies to meet an array of challenges: ensuring employee safety or managing a remote workforce, managing disrupted supply chains, and responding to the ongoing economic uncertainty. In turn, compensation strategies were also modified.

Given COVID-19, 2020 was not an ideal year to launch a new compensation survey. The compensation data presented in this report may have been impacted by these challenges. As a result, CAP and MLR Media plan to conduct the second iteration of the Family Business Executive Compensation Survey in summer and fall of 2021. In this next iteration, we will be able to evaluate trends in compensation practices and continue to provide executive compensation benchmarking data to family businesses as they transition to normalcy.

Survey Contacts

For information on participating in the next survey, please contact:

• David Shaw, survey director, [email protected]

For information on the survey analysis or for any executive compensation-related questions, please contact:

• Bonnie Schindler, survey author, [email protected]
• Joshua Hovden, survey author, [email protected]
• Bertha Masuda, contributing author, [email protected]
• Susan Schroeder, contributing author, [email protected]
• Han Wen Zhang, contributing author, [email protected]

2020 was a particularly robust year for initial public offerings (IPOs) and special purpose acquisition companies (SPACs). Many companies took advantage of favorable capital markets, and we saw much-anticipated IPOs such as Snowflake, DoorDash and Airbnb hit the public markets in 2020. Founders, employees, and investors unlocked significant value in these IPO events.

CAP’s review of technology company equity practices around IPO reveals several emerging compensation trends: a shift in equity award vehicles from stock options to restricted stock units (RSUs), increased use of double-trigger vesting for restricted stock, and large, company-friendly equity authorizations. Additionally, some companies implemented noteworthy founder compensation practices.

Pre-IPO Equity Grant Practices

CAP reviewed a sample of 20 high-profile, technology companies with IPOs in recent years to understand their equity practices leading up to the IPO.

List of companies:

Options are still predominant. For companies anticipating growth, options continue to be the favored equity award for a variety of reasons. For employees, there is no tax burden at vest, and the employee has control over the settlement of the award and associated taxation. If incentive stock options (“ISOs”) are used, the employee receives capital gains treatment upon disposition of shares, assuming the required holding period is met. Options are also favorable from the shareholder (often financial sponsors) perspective. Options align the interests of employees with their shareholders, as no award value is realized unless the company value appreciates. Typically, stock options are granted at-hire and allow employees to share in the value of the company as it grows and matures.

Increased use of RSUs with unique features. Some companies (such as Lyft, Uber, and Dropbox) shifted to granting more RSUs in the years leading up to IPO. In these cases, RSUs have double-trigger vesting, which requires both time-based service (typically four years) and event-based requirements (typically a qualifying capital event such as an IPO) be satisfied in order for the RSUs to vest.

Companies naturally shift from granting options to RSUs as they grow and mature. Reasons for this include changes in a company’s growth expectations post-IPO, the need to conserve shares, and a desire for differentiated equity grant programs as companies grow in size and complexity. However, as seen with recent IPOs, favoring RSUs could be attributed to the fact that award values are easier to understand and are somewhat protected, even if company valuations fluctuate between funding rounds. Companies also benefit, from an accounting perspective, with vesting being dependent on a qualifying capital event as no accounting charge is incurred until such event takes place.

Adopting double-trigger RSUs has potential downsides, though. These include mounting pressure to go public (as evidenced by media coverage of the long-delayed IPO of Airbnb), and a significant tax burden for employees whose equity vests upon IPO. Employees are exposed to the financial risk of being taxed on stock compensation that has since declined in value since IPO. Also, when employees leave the company before the IPO event, their unvested shares are forfeited. This may pose an issue for recruitment unless the IPO timeline is clear. For the company, event-based vesting triggers a major accounting expense, and the large number of shares being sold may temporarily impact the company’s share price.

Note: No companies in the sample granted only full value shares prior to IPO.

Equity Authorization Pre- and At-IPO Practices

Before going public, companies often need to adopt multiple equity plans for incentive purposes. Not surprisingly, long time horizons and numerous funding rounds before IPO require companies to authorize additional equity share pools for compensation purposes. Private company investors are asked to approve incentives so that the company has enough “dry powder” to scale the executive team and grow its employee base. At median, equity overhang1 pre-IPO is 21.5% among the sample group.

In conjunction with the IPO, most companies (95% of companies in the sample), asked for an additional equity authorization. Median at-IPO overhang is 27.7% of common shares outstanding (CSO). In addition to the share request, companies often seek annual evergreen provisions (typically 5% of CSO per year) and liberal share recycling provisions.

Employee Stock Purchase Plans (ESPPs)

Many of the technology companies that went public implemented ESPPs in conjunction with their IPOs. ESPPs enable employees to purchase company stock, often at a discount, through payroll deductions. Most ESPPs are designed to be qualified plans under Internal Revenue Code Section 423, and from the standpoint of proxy advisory firms, such as ISS and Glass Lewis, are considered non-controversial. ESPPs are an appealing way for all employees to voluntarily acquire company shares after the IPO event. This is especially important as companies shift from granting equity to all employees to granting equity on a more selective basis (e.g., senior manager and up). An ESPP is an employee benefit that can be structured in ways (such as rollover provisions or extended offering periods) that make it an attractive recruiting and retention tool.

Founder Compensation

Every company has a different growth trajectory in its early years after formation. Founders typically must dilute personal ownership of the company in order to raise necessary capital. Companies in our study typically had multiple founders; however, not all founders contribute in the same way as the company evolves. Founders are often uniquely positioned and are key assets to their companies, which makes their retention crucial especially since finding a suitable replacement may be both difficult and expensive.

Founders who remain in executive roles after IPO have varied compensation packages depending on the specific circumstances. In some cases (Snap and Airbnb) founders reduced their base salaries to $1 post-IPO in exchange for significant equity grants in conjunction with the IPO. This is not typical as most founders maintain cash compensation (base salary and target bonuses) at market competitive levels.

With respect to equity compensation, some companies (including Airbnb and DoorDash) provided significant equity grants at or just prior to IPO. These grants often vest based on the achievement of performance criteria (e.g., stock price or market capitalization goals) and have long vesting periods that correspond with the magnitude of the award. Companies view these additional, often significant, equity grants to founders as necessary to incent continued service and focus, to maintain alignment with stockholder interests, and to mitigate the dilutive effects of public offerings on founder equity stakes.

Conclusion

Despite no “one-size-fits-all” approach to compensation, it is important to understand the various equity compensation tools available for companies preparing for an initial public offering. CAP’s review of recent technology IPOs highlights the latest trends in equity compensation needed to attract and retain skilled talent. Equally important is proactively and frequently communicating the value and mechanics of equity to participants for these awards to have maximum impact. Aligning pay philosophy with company culture and shareholder interests are important guiding principles to consider as companies design their equity incentive practices around IPO.