What Business Thinks™ About Executive Compensation

A Minneapolis family-owned firm faced a dilemma when the founder’s children decided to bring in external management. All the qualified candidates insisted on an equity stake, but family members were unwilling to dilute their ownership and extend voting rights to an outsider.

The solution? “Phantom equity” in the form of long-term incentive payments determined by the company’s long-term return-on-equity performance. It worked—the company hired a talented CEO, and the CEO landed a position that was potentially lucrative based on future performance.

Long-term incentive use is just one of the executive-compensation issues explored in a recent survey of privately held companies conducted for Twin Cities Business by Organizational Concepts International (OCI), a Minneapolis-based human resources consulting firm. The survey was designed to fill a gap in available data regarding the design of compensation packages at local private companies (see the sidebar at the end of this article on “Survey Metrics.”)

More Long-Term Incentives

Competing with public companies for top talent has long been a major concern at private companies. They struggle to match compensation packages at publicly traded firms, which can include stock options, restricted stock, and similar forms of equity.

“Private companies are always asking, ‘What do we do to make up for that?’” says Jason Williams, a managing principal at OCI. “They don’t simply give up and accept that public companies get all the best talent.

“Some private companies have tried offering greater base pay, while some have tried doing it with annual cash incentives,” he continues. “But eventually, you get to a point where you just can’t make up the value of a stock award in that way.”

While 95 percent of for-profit companies in the What Business Thinks survey have an annual incentive plan in place for key executives, a third of the companies also have installed a longer-term incentive compensation plan. The larger the company, the greater the percentage of executive pay earned through either an annual incentive or a long-term incentive plan.