Do incentive-pay practices differ between publicly traded and privately held companies? If so, how? Research released this year by WorldatWork, Deloitte Consulting and Vivient Consulting set out to answer these questions.

Incentive-pay practices do differ between public and private companies. Short-term incentives (STIs), including annual incentive plans, are structured similarly across both organizational types. However, public companies are much more likely than their private counterparts to offer STIs to the broader employee population. In contrast, private companies place greater emphasis on STIs in their total rewards programs, as STIs are the companies’ most effective compensation tool for attracting and retaining talent. However, private companies tend to reserve short-term rewards for exempt employees and above.

On the long-term side, publicly traded companies rely heavily on long-term incentives (LTIs), such as restricted stock and stock options. Restricted stock has surpassed stock options as the LTI vehicle of choice for public companies. In contrast, private companies favor cash LTI plans, such as bonus plans with goals and payouts tied to multiyear performance, over real equity. Public companies are more likely to make broad-based equity grants to the larger employee population, while private companies concentrate LTI awards on top executives.

The survey, based on 2013 survey data, provides a rare look at how private companies attract, motivate and incentivize their employees. Data includes hard-to-find statistics on the size and nature of short-term and long-term incentive pay practices, including the types of plans and vehicles used, as well as private company equity sharing ratios, liquidity, and valuation provisions. More than 190 participants from private, for-profit organizations responded to the survey.

Previously conducted in 2007 and 2011, this year’s incentive pay compensation surveys represent our third collaboration with WorldatWork. With this longitudinal data, we provide insight on the key compensation trends and explain the reasons behind them.

Compensation Trends: Privately Held Organizations:

• More than 75% of companies with a short-term incentive plan offer more than one program, with 39% of respondents reporting four or more short-term incentive plans.
• Annual Incentive Plans, the most prevalent short-term incentive plan at private companies, are offered to employees at the exempt, salaried level and above at most organizations.
• In 2013, 56% of companies offered long-term incentive plans, down from 61% in 2011. Long-term cash plans are the most prevalent long-term incentive vehicle with 51% prevalence in 2013.

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.)