It’s no secret that private equity firms can offer executives the opportunity to participate in highly leveraged compensation arrangements that emphasize long-term ownership and/or are tied to long-term value creation. While still far from the norm, private equity recruiting has become a more frequent topic of discussion for some public companies, particularly in energy and technology sectors, where leadership experience is in high demand. For compensation committees, this dynamic raises questions about retention, communication and how different compensation models align with different ownership structures and time horizons.
Compared with the prospect of significant long-term wealth creation, a pay package that previously looked competitive and fair, if not generous, can suddenly feel less compelling—and the gap between the two can put boards in a difficult position. “Some companies have come to us and said that private equity players in their industry are dangling big dollars to lure away their top talent,” says Michael Chavira, a managing director at FW Cook. “They say, ‘We want to do everything we can to retain them, but it is difficult when they’re offering comp upwards of $50 million or $100 million.’” In many cases, these potential values are discussed early in the recruiting process as illustrative outcomes tied to successful execution and a future liquidity event.
What’s often missed, however, is that those eight- and nine-figure potential payouts are far from guaranteed. They are highly contingent, long-dated, illiquid and dependent on a specific set of performance and exit conditions. “One key approach to dealing with this retention challenge is defining the dramatic differences between private and public company cultures and pay models,” says Chavira. “Private equity companies aren’t just writing a check for $50 million—a lot has to happen for executives to ultimately realize that value.”
PE vs. Public Company Pay Practices
While the numbers private equity recruiters float when approaching executives can be compelling, those figures are highly conditional. Like public companies, they offer salary and annual cash bonuses, but the real attraction is the equity participation, which is in the form of a concentrated equity stake earned over a longer performance horizon. “Private equity compensation is usually delivered through a meaningful ownership interest that’s designed to reward absolute value creation over time,” explains Chavira. “There are rigorous performance goals that are generally aligned with a five-year or sometimes longer investment cycle.”
What’s more, both the value and timing of payouts are often more uncertain than executives initially realize, says Austin Lee, a principal at FW Cook, who adds that PE compensation is typically heavily weighted toward appreciation-based equity such as stock options rather than full-value awards like restricted stock. “Payouts and liquidity tend to be tied to the exit strategy,” he explains. “While PE firms may provide an expected time window, the ultimate timing and value depend on business performance and market conditions.”
PE hires may also find themselves handcuffed to the long-term nature of the investment by a potential payout that never quite materializes or is ultimately forfeited if the executive departs.
Public company pay programs, by contrast, are generally designed to balance incentives with some form of predictability and continuity. Compensation is typically delivered through a combination of base salary, annual cash incentives and annual equity grants that include both performance- and time-based awards. These programs often include overlapping grant cycles and more frequent vesting opportunities, providing executives with a more reliable realization of value over time and strong line-of-sight between performance and compensation.
Performance metrics, too, differ, with public companies also sometimes tying a portion of long-term incentives to the company’s performance relative to peer companies, while PE firms focus on absolute value creation. “In public company programs, performance is often assessed against both internal financial goals and relative peers over a three-year performance period,” says Lee. “That structure generally results in more frequent and predictable payouts over time, rather than a single, exit-dependent outcome.”
Responding to the PE Retention Challenge
For companies grappling with PE talent poaching, information is the first line of defense. Understanding—and being able to explain—the difference between a potential PE jackpot versus an often more reliable public company program is crucial. When a top performer is weighing a leap, leadership should be ready and able to articulate how their pay programs are different, including the risk, timing and probability of payout, as well as positive cultural attributes and long-term career prospects in their organization. That includes communicating that their program will likely provide a steadier stream of equity and more predictable vesting.
“In addition to compensation, there are other factors that make people decide to stick around, such as a good working environment and the possibility of upward mobility,” adds Chavira. “Being able to say, ‘When I retire you may be the next CEO,’ can play into that communication.”
Companies that are already experiencing elevated retention risk may want to consider proactively communicating with top talent, rather than waiting until an external offer is on the table. In practice, this often means reinforcing how the existing incentive plans work, clarifying long-term opportunity within the organization and ensuring executives understand how sustained performance can translate into meaningful outcomes/ payouts over time, rather than making immediate changes to compensation.
In more limited cases, boards may also consider making a tactical adjustment to its pay practices, including selective, performance-based equity awards that sit outside the regular annual grant cycle. These arrangements are typically reserved for a small number of senior leaders and are tied to clearly defined, multi-year objectives that reflect true outperformance, such as transformational growth initiatives, major capital investments that generate returns well in excess of expectations or sustained value creation that significantly exceeds long-term targets.
Such adjustments are not designed to replace the regular incentive program. They tend to be very targeted, used selectively and tied to results/outcomes that translate to long-term shareholder value. “These are not very common,” notes Chavira, “When used, these awards are typically designed with rigorous performance targets, longer vesting periods, and limited participation, reinforcing alignment with shareholders rather than guaranteeing retention. These awards are typically structured so that meaningful value is delivered only if shareholders have seen true outperformance. If these awards pay out, shareholders are in a really good place, as well.”
Because these types of awards differ from standard market practice, clear and robust disclosure is critical. Companies that have implemented them successfully emphasize the rationale, the one-time nature of the award and the specific performance conditions required for there to be a payout, helping shareholders understand both the intent of the award and the linkage to their returns.
The takeaway for boards and comp committees isn’t that they need to mirror private equity compensation, it’s about understanding how the different models create value and ensuring that their own programs are aligned with the company’s strategy, ownership structure, culture and leadership expectations.
