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Private Company Executive Pay Governance

Part 3. Private Company Executive Compensation

Like their public company peers, many private companies have an executive compensation governance structure that includes a board of directors. All C Corporations and S Corporations are legally required to have a board. While not all privately held companies, including limited liability companies (LLCs), are required to have a board, many do in order to have a formal governance structure and to attract investors.

The most common committee among private company boards is a compensation committee, according to research from CAP and MLR Media’s Private Company Director magazine. Even when a private company board does not have standing committees, executive compensation is often a topic addressed by the full board. Given the prevalence of compensation committees at privately held companies and frequent board oversight of compensation, Part 3: Private Company Executive Compensation was added to address the unique compensation considerations for private companies.

Private company boards and compensation committees have oversight of similar topics as their public company counterparts, including executive compensation philosophy and strategy, top executive pay decisions, incentive compensation design and goal-setting, and ongoing monitoring to ensure sound pay processes and programs. Boards and compensation committees may also play a role in related topics, such as succession planning, evaluating the CEO, communicating with shareholders about pay and human resource topics, mentoring human resource executives, and deciding whether to hire outside compensation counsel and selecting the advisor.

Unlike public company peers, private company executive compensation is subject to less public scrutiny and regulation. Private companies are not required to disclose their executive compensation practices and decisions publicly or to obtain a “Say on Pay” shareholder vote. Private boards and compensation committees have greater opportunity for flexibility and creativity with executive pay, and therefore private company executive pay models often differ from those of public company counterparts.

Joining the Compensation Committee or Board

The onboarding process for private company compensation committee members and board members who have responsibility for executive pay matters will be less formal and less structured than the process when joining a public company board. Larger private companies will have more structured onboarding processes than smaller peers or those in the earlier stages of board and/or committee formation.

Information that should be shared with new compensation committee members or board members with oversight of executive compensation matters include:

  • Board charter and committee charter: The charters will outline board and committee roles and structure, responsibilities, processes, functions, and decision-making authority. If the compensation committee does not have a formal charter, the new committee member could suggest that the committee prepare one in the future.
  • Board and compensation committee annual calendar: The calendars should include the meetings scheduled and topics to be covered at each meeting. If the committee does not have a formal calendar, the new committee member could suggest this as a helpful planning tool.
  • Overview of executive compensation programs:
    • Compensation philosophy, including how the company positions itself relative to market benchmarks
    • Executive salary structure
    • Annual incentive design and payout history
    • Long-term incentive design, including termination provisions
    • Executive perquisites and benefits
    • Executive contracts, including any change-in-control agreements
  • Executive compensation benchmarking studies: The study, whether conducted internally or externally, should provide an assessment of executive pay relative to its market for talent, and an overview of the methodology used for benchmarking, including peers and survey sources, and valuation of different pay elements.

New committee members and directors with oversight of executive compensation will also want to meet with the compensation committee chair or directors involved in pay decisions, the chief executive officer, the head of human resources, or other relevant parties to understand what talent and pay issues the company has been facing. Issues to inquire about include:

  • Whether the company is anticipating a transaction in the future
  • Succession planning or anticipated leadership changes
  • Unplanned turnover at the executive and broader employee level
  • Challenges filling leadership positions or other roles
  • Incentive payouts that feel out of step with results

The remainder of this section covers the key differences in private company executive pay relative to public companies, and the pay models at different types of private companies. Understanding the unique aspects of private company executive pay will help directors with oversight of compensation know what questions to ask and how to drive an effective executive pay program.

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