Private firms get creative: to compete with public companies and their big CEO bonuses, closely held firms need new tools.

Author:Saltman, David

When Dick Grasso's $187.5 million compensation package was revealed at the New York Stock Exchange, it triggered an outcry that forced his resignation. But it also struck a delicate chord with the CEOs of privately held companies, who perceive they are not sharing in the same sorts of bonuses and other forms of compensation that their counterparts at publicly traded companies typically receive. "It's a clear case of bonus envy," quips Graef S. Crystal, a leading authority on executive compensation.


Large all-cash salaries have become increasingly hard to justify, even at private companies that don't have to answer to skeptical shareholders. So CEOs of privately owned companies have gradually become compensated in other ways: required notice, severance, deferred compensation and vesting, as well as long-term incentives, including ingenious variations on stock options when no public stock is available.

Long-term incentives remain the largest component of CEO pay, in private as well as public companies. "If a CEO has 100 percent of salary as a short-term incentive, it would be fairly typical to have 400 percent of salary for the long term." says Peter Chingos, a leader of the compensation practice at Mercer Consulting in New York.

Many sizable private companies have owners who are willing to pay their executives a lot of money but are reluctant to give them even one share of stock. To do so would mean sharing some of their power. One example, notes Crystal, is Continental Grain, which despite being the world's largest private company, remains tightly held by its nonexecutive owners.

Another common scenario is a private company whose owners resist taking the business public because they want to preserve ownership for the next generation. Towers Perrin, the global consulting firm, is a case in point, says Crystal, a former vice president and director of the firm. "The argument was," explains Crystal, "that we inherited the company from the previous generation. And if we went public, the future value would be reflected in the stock price and we'd all get rich, but we'd deprive the next generation. So even though it's a multimillion-dollar company. it's still privately held."

Different But Equal Pay

Nevertheless, many public companies are compensating their CEOs better than ever, creating stiff competition among both public and private concerns in terms of recruitment. "The equity incentives became so big and so powerful in...

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