A private equity firm often seeks to enhance its return on investment by revamping the executive team. When a private equity firm takes majority control of an organization, it can implement strategic decisions that alter the company’s short- and long-term vision.
Choosing a new private equity CEO isn’t easy. PE firms must find someone who:
A private equity firm must choose a CEO with a history of successful transformation in other organizations. Prior successes are usually indicative of future wins. The new CEO must also agree with the private equity firm’s ideas for the company’s future. Misalignment of values and vision can spell potential organizational disaster.
A private equity firm is more likely to choose a CEO with less experience in the C-Suite. According to Harvard Business Review, most private equity companies aren’t looking for someone with years of experience in the top role. In fact, many PE companies purposely choose someone without loads of experience leading a company.
Often, PE companies want someone who can accomplish specific objectives, like cutting expenses or making changes to the business model. They’re more open to candidates from backgrounds that aren’t executive-minded.
For instance, they may choose a candidate with industry experience who has actively driven profound change but hasn’t held the position of CEO.
PE companies usually focus on driving specific results in a short period. They want someone open to new ideas and not hindered by an old-school way of thinking.
CEOs with extensive experience as executives sometimes want to apply their prior knowledge to their new roles. But PE companies don’t want CEOs who use the same rule book repeatedly. They’re looking for quick-minded individuals who can use innovative techniques to accomplish results.
There are no hard and fast rules that PE companies abide by when choosing their next investment. PE companies are looking for a solid return on their investment, and they’ll select organizations they believe they can improve by introducing changes.
PE firms can choose investment opportunities in any market sector, including industry and manufacturing, business services, and technology.
Some PE companies concentrate on one industry when developing a portfolio of firms. Focusing on a single sector allows them to create strategies to apply to the companies they invest in.
Other PE companies are more willing to invest in several industries. The industries they choose depend on the financial opportunities they anticipate from making their investments.
When investing in a new organization, the first thing a PE company will look for is the prospect of a good return. Companies that have a great idea and vision but not the finances to bring their products to a large market are typically good options. A PE company can provide the funding to increase market share and revenue strategically.
Another reason for investing is the potential for improvement. Many organizations become bogged down by inflexible management teams and a cloudy vision for the future. PE companies can identify organizations ripe for change and implement new processes to improve their chances for success.
CEO compensation varies depending on the industry and revenue of an organization. Unsurprisingly, organizations with higher incomes can afford to pay their CEOs more.
According to salary.com, the average base pay of a CEO is $802,900 in the U.S. CEOs working for smaller organizations or those with less experience may receive a smaller salary. The lower end of the pay scale for a CEO is $428,452, while only 10% of CEOs earn $1.2 million or more per year.
The median bonus for a CEO is $499,700. However, bonuses vary widely. Some CEOs get performance-based bonuses based on whether the company meets particular objectives.
It’s common for a private equity company to set specific objectives for its CEO to achieve to qualify for a bonus. Generally speaking, PE companies don’t want to hold on to their investments for longer than necessary.
If the CEO can bring about critical changes quickly, the PE company can increase the organization’s value and realize a quicker return.
According to ClearRidge Capital, the average holding period for a PE company is three to five years. After the holding period passes, the PE company sells its stake in the company for a return on its investment. The sooner the PE company recoups its money, the quicker it can invest in another company to repeat the same process.
Deciding on an appropriate equity structure for a new CEO is challenging. The more equity the CEO has in the company, the more likely it is that they will implement changes according to the PE company’s wishes.
If the changes are successful, the CEO will reap the financial returns of the PE company’s investment through an increased value in their equity holdings.
If the company hasn’t built up a significant source of revenue, the PE company may offer more compensation in equity as an incentive for the CEO to stay. The PE company may not be able to offer higher base pay and bonuses, but increased equity might inspire the CEO to take action to increase the company’s profits quickly.
CEO salaries and compensation aren’t set in stone. Private equity firms can vary CEO compensation packages depending on expectations, experience, and the company’s current revenue.
Setting CEO pay can be tricky, especially for organizations in the early stages of their development. Offering too much to a new CEO can impact the company’s profitability. At the same time, too little compensation won’t attract top talent.
Each private equity firm must carefully weigh its purpose for the CEO when making compensation decisions.
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We also invite you to continue exploring more executive recruiting insights from our team: