What Drives Private Company CEO Pay?
- Size Matters: Of those surveyed, private companies with revenues of $50 million to $100 million pay about 38% higher salary and 70% higher total cash than companies with revenue below $25 million.
- Industry Impact: CEOs of privately held life science/pharma/healthcare-related companies in our survey paid the highest cash compensation, but real estate companies paid the highest total direct compensation.
- Ownership Stake: Those who own a significant portion of the company will focus on having an adequate level of cash compensation and typically not expect grants of equity.
- Location, Location, Location: We found that private companies located in large metro areas pay 20% to 30% more in cash compensation.
- Ownership Structure: Family-owned companies in the $100 million to $500 million range pay slightly more in cash compensation than private companies overall but the same in total direct compensation. Private companies tend to pay less than public, especially with regard to total direct compensation, as they do not have actively traded equity available. CEOs of private equity-owned companies tend to have much higher equity compensation than the average CEO of a private company.
Founding of Company Under CEO’s Leadership
The survey collected and reported key demographics of CEOs of small to medium-sized family-owned private companies:
CEO Profile of Small to Medium-Sized Family-Owned Businesses
|Comparison CEO Profile
|9 years at public companies
|% Who are Founders
|29% private companies overall
|% Who Have an Ownership Stake
|61% private companies overall
|Average Percent Ownership
|33% private companies overall
As shown in the survey statistics above, founders and CEOs of family-owned companies are usually long tenured and have a high level of company ownership, the value of which is typically created through “sweat equity.” However, this equity is not liquid, and the topic of an exit strategy or liquidity event is often quite taboo in family-owned businesses. This raises the question of how to determine the appropriate level and form of cash compensation that is fair and equitable to the CEO and other company owners. This can become a sensitive topic, especially in cases where there are family members or others who have an ownership stake but are not working for the company. Solid market data can help avert uncomfortable conversations.
Growth and Expansion of Leadership Team
As the company grows, the CEO will need a strong leadership team. This typically involves hiring key executives in operations, finance, and sales. Filling these roles requires offering a competitive compensation package. If the CEO is underpaid, this can create a compression issue, making it difficult to attract and retain top talent. For instance, the competitive pay package for a CFO at a private company typically runs 60% to 75% of the CEO’s. So, if the CEO pay is low, it may be hard to maintain the optimal relationship in pay levels. The other issue is whether the CEO or family is willing to give up any of their equity to entice new talent to join the team.
Retirement of CEO and Succession to Another Family Member or External Hire
The next phase is when the founder/CEO is planning to retire. At this time, there are key decisions that need to be made:
- Is the board structure adequate, and are there members outside of the family and/or management who can remain impartial third parties?
- How will the current, soon-to-retire CEO access the value that they created over the years?
- If ownership is being passed to the next generation, what are their financial needs and career priorities?
- Are the primary shareholders in agreement with regard to the value of the company and the ongoing ownership structure?
Once the company is ready to identify their successor, it is essential to develop a package that will attract the appropriate talent with the needed skill sets. For instance, the competencies of a CEO who would manage the company in its current structure versus a CEO who would take it public are different, and thus, the structure of the compensation needs to be different.
The package typically includes a mix of base salary and incentives. The dollar amount and balance of these pay elements is very much driven by the strategic plans of the company. Based on the BDO survey, for example, the average CEO pay package is composed of 23% long-term incentives/equity for private companies compared to 51% for a private equity-backed firm. Pay mix may include:
- Annual performance bonus
- A way to link CEO performance to the long-term success of the company, typically through real equity or a form of phantom equity (an award that references equity but does not entitle the recipient to actual ownership in a company).
- Retention is also a consideration. This can be addressed through the real or phantom equity, a long-term cash bonus plan, or through a vehicle such as a split dollar life plan, which allows the sharing of the cost of a premium for a permanent life insurance policy.
The key stakeholders (current CEO, board, owners) need to keep in mind that an external hire may not have an ownership stake; thus, it is not unusual for the pay package to be higher than that of the current founder/owner CEO. For instance, for a company between $25 million and $50 million in revenues, our survey found that:
- Total cash compensation averages 17% higher for non-founder CEOs
- Total direct compensation is 13% higher for non-founder CEOs