Page 27 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 13

for sale to the company (or named major shareholder) before selling or otherwise transfer-
ring ownership to someone else. This would occur at the time of leaving the company,
disability, death, or other completion of a period of employment. These situations require the
company to periodically arrange for an impartial appraiser to value the stock.
Private equity firms buy shares in privately-held companies in the hope of selling them
at a higher price later on, when the company becomes a publicly-held company. Investments
could be in small start-ups or well-established companies in the mature (if not decline) stage
of development. These investors began as the investment arms of well-established wealthy
families, such as the Rockefellers, evolved into the hostile takeover investors of the 1980s, and
now include company-initiated methods of raising capital. Private equity firms not only offer
competitive salaries and bonuses, they offer an ownership position in the company which can
far exceed what publicly-held companies can offer, if the company is sold or goes public.
Both private and public companies vary not only by type of industry, but also by the
extent to which the industry is or is not heavily, regulated. Where it is heavily regulated, pay
programs (especially incentive pay plans) are likely to be subjected to a close review by the
regulatory body before they can be implemented. This, of course, changes dramatically when
the industry is deregulated.
Tables 1-4 through 1-7 attempted to identify the relative importance of each compensa-
tion element in a for-profit, publicly held organization not subject to close regulatory review.
However, as suggested earlier, these values would not be appropriate for either a privately
held or not-for-profit organization. Neither has stock traded on a major exchange, thereby
dramatically affecting the incentive plan programs. Furthermore, not-for-profits have to be
very careful in structuring an incentive plan to ensure there is no undue emphasis on net asset
change (i.e., the remainder after expenses have been subtracted from revenue, or what for-
profits would call profit). The three types of organizations are contrasted during the growth
phase in Table 1-8. Note the reversed positions in privately held and publicly traded compa-
nies in incentive types because common stock is not available to the privately held company.
And for the not-for-profits, the absence of long-term incentives places more emphasis on
salary and perquisites. If the privately held company chose to develop a phantom stock plan
based on internal measurements, it might more closely mirror the publicly held company’s
mix in the growth phase, although it is unlikely the premium the stock market would place
on the stock could be matched with an internal plan.

For-Profit
Compensation Publicly Privately
Element Traded Held Not-for-Profit
Salary Moderate Moderate High
Employee benefits Moderate Moderate Moderate

Perquisites Low Moderate High
Short-term incentives Moderate High Moderate
Long-term incentives High Moderate —

Table 1-8. Compensation elements by type of company in growth phase