Examining Executive Compensation in Privately-Held Companies Using a Consulting Approach
Introduction
Boards of directors and leadership of privately held companies often ask how to benchmark executive compensation within the market. Given the unique nature of these firms (for example, they are not subject to compensation disclosures like their publicly traded counterparts, nor do they often use equity compensation as part of the total rewards package), how to appropriately identify and evaluate market data and align those findings with the target company is often challenging. Experienced compensation consultants provide technical expertise and a real-time view of best practices and trends. Developing a best fit approach to compensation is where a consultant’s experience is best leveraged.
Using Proxy Peer Group Data
Compensation data from publicly filed proxy statements, found in the Compensation Discussion and Analysis ("CD&A") section, is one of the primary sources of data. Using this data involves a peer group development process that is customized to reflect the unique nature of each client. This research typically considers relevant industry, financial performance, and a qualitative assessment for defining a targeted peer group for the analysis.
Boards and executive leadership may question the applicability of using proxy data as part of their compensation analysis, since publicly traded companies differ from privately held companies in many ways. The table below provides both the benefits and limitations of proxy data:
Using Published Surveys
Published surveys focused on executive compensation are valuable tools that provide an additional data set for evaluation, along with proxy data, or may serve as a stand-alone analysis if peer data is limited. Survey data does not provide as much detailed information regarding compensation structures and incentive design (usually limited to target values for variable pay), nor does it provide a specific view of the participants reporting the data.
Compiling Relevant Data
No source of data is inherently better than the other. Rather, data availability, quality, and client uniqueness combine to drive the strategy of the compensation study. Combining a proxy analysis with published survey data helps to fill in gaps to provide a broad view of executive compensation within the market.
Compensation consultants provide valuable knowledge in researching and compiling market data for executive compensation benchmarking. As subject matter experts, the compensation consultant guides leadership and the board of directors through the entire process and helps to navigate what, at times, may be difficult and sensitive terrain. A wide array of data is also a valuable resource that consultants bring to compensation study engagements. Consultants should house a strong representation of industry and market compensation data in the form of published surveys, publicly available data (condensed in a digestible format) and academic resources for reference.
Summary
EA Compensation Resources LLC has supported privately held companies with their executive compensation needs for more than 30 years. Assessment, design, education, and updates are some of the ways in which we engage with our executive compensation clients. As markets become more volatile and the demand for specific skills to fill executive roles increases, the need to accurately assess and design an effective total compensation package has been top of mind for boards, business owners and senior leadership.
