A recent Stanford study of P/e (private equity) owned company CEO compensation across 144 sample firms found the following:
“To summarize the key results in this section, we ﬁnd that, relative to public corporations, on average, PE-owned ﬁrms:
(i) provide the CEO with 2.3 percentage points more equity (that is, nearly twice as much equity as an average public company CEO holds);
(ii) 9.6% lower salary; and
(iii) 12.7% higher variable pay share.”
Another p/e company stock compensation survey in 2013 is available at http://www.pwc.com/en_US/us/private-equity/assets/pwc-private-equity-stock-compensation-survey.pdf
This survey found a median of about 17% of equity (apart from what was granted on acquisition) available to executives through a company reserve of that amount for compensation, which is spread through the top five executives. 50-75% of the financial return to these executives is tied to the p/e company’s return as generated on the p/e company’s exit.
Managements are being required to invest 20-50% of what they get when the p/e company buys their company back into the company, as “table stakes” to show their commitment to the deal. This comes in at a lower valuation than the valuation on exit, of course, so is another way management can gain from equity ownership, if their partnering with the p/e sponsor is successful.
Total CEO compensation at p/e companies runs about three times as high as that of public company equivalents, according to this survey, much of same based on the CEO and the p/e sponsor’s multiple of invested capital when the p/e company exits the investment by selling same to a public company, another p/e company, or members of the public through a public offering.
What does this mean for mergers and acquisitions? Plan to stick around and take the “second bite of the apple” when you sell a company to a private equity sponsor, and you can benefit from their access to capital to profit when they do after they invest in your deal.