Public Company CEOs vs. Private Equity CEOs: Understanding the Market
The information needed to analyze public company CEOs is quite comprehensive and readily available. And these details are so accessible precisely because public companies must fulfill specific reporting requirements, including giving statements about their executive hiring practices and compensation plans.
With a simple Google search (or, if you’re feeling inclined, an EDGAR query), you can learn just about any information you want to know about a public company’s executive team. This includes details such as their age, income, and work history.
However, the same can’t be said of private companies. A search for data concerning the executives of a private company won’t provide many results beyond names and any information the organization has explicitly chosen to disclose.
For that reason, it’s been exceedingly difficult to find details about the CEOs of companies held by private equity (PE) organizations. Private equity firms frequently purchase smaller organizations through leveraged buyouts and other means, and they remodel the organization to improve its valuation before reselling it to another investor.
Remodeling an organization to fit its criteria usually involves replacing key executives with hand-picked ones chosen by the PE firm. For instance, a PE firm may use its own funds or assume debt to acquire its target.
Afterward, it will quickly remake the company from the top down. This often involves replacing key team members, recalibrating business operations, and smoothing any financial issues.
Ideally, the company’s valuation will increase significantly. This grows into a significant gain when the PE firm decides to sell its stake to another investor. Usually, PE firms hold onto their organizations for up to three years before turning them over to another PE company or investor.
How PE Companies Choose Their CEOs
When a PE firm purchases a target organization, it will likely make significant changes to the company’s structure very quickly. Over 71% of PE-owned companies replace their current CEO with a new one selected by the PE firm.
Newly elected CEOs are frequently external hires unfamiliar with the organization they are assigned to lead. They may have some industry experience, but they essentially walk into the organization without any internal understanding to help guide their future choices.
Typically, CEOs selected to lead PE-owned organizations are individuals in management or executive-level positions at public companies. However, they usually aren’t CEOs. For instance, they may be high-level finance or operations directors with significant industry experience that the PE-owned organization can benefit from.
Some PE firms hire unattached consultants or those who have previously led an organization or advised organizational leaders. In certain cases, consultants can be an excellent fit because they come with no strings attached, and the PE firm won’t need to worry about transitory costs.
Occasionally, a PE firm will hire a CEO directly from a public company, but this is rare. Often, CEOs at public companies have do-not-compete contracts that stipulate they can’t work for competitors or other organizations in a similar industry. They may also have contracts that are burdensome (and expensive) to get out of.
How Public Companies Hire Their CEOs
Public companies usually take the opposite approach when hiring CEOs. Instead of hiring CEOs outside their organization or industry, they prefer to source internal candidates with lengthy experience. Nearly 72% of public company CEOs earn the position through a promotion, not an executive search.
You can assume that public companies take the internal rather than an external approach because they value internal candidates’ knowledge and expertise, which an external worker simply can’t replicate.
While boards and other executives can always explain a company’s work culture or reasons for its internal processes, words can only do so much. It often takes hands-on experience to internalize how an organization does business.
Another factor involved in public company executive hiring decisions is their customers. Internal candidates, especially those who regularly interface with major clients, help ease valuable customers’ concerns about the transition. Similarly, investors may feel better knowing that an internal executive isn’t going to make sweeping changes.
Finally, relationships play a role in a public company’s selection of its future CEO. Since most candidates are internally sourced, they may be familiar with key employees in the organization. They’ll have strong relationships among staff members that benefit the new leader as they ascend the corporate ladder.
CEO Compensation Strategies Among Public and PE-Owned Companies
So how does a PE-owned CEO’s compensation compare with public companies? Quite favorably, according to research by the University of Chicago. On average, a PE-owned company CEO can earn millions, with some compensation packages estimated at nearly $70 million, which includes their stock ownership options.
Of course, compensation can vary if a PE-owned company fails to meet its expected objectives. CEOs whose primary earnings come from stock options may not see the return they seek if they don’t meet their earnings targets. Similarly, if the company is slow to gain value, it may take a much longer time to see a return on its efforts.
In contrast, public companies typically provide their CEOs with salary and stock options. As stock options may take some time to increase in value, the annual compensation for a public CEO may be significantly less than that of a PE-owned firm.
At small-cap S&P 600 companies, the average annual compensation is under $3 million. Even larger-scale companies on the S&P 500 fail to earn the same amount as CEOs at a PE-owned organization. Median annual earnings for S&P 500 firms typically hover around $10 million, including all incentives beyond base salary.
PE-Owned Firms Come with Extensive Financial Benefits for CEOs
A CEO at a PE-backed organization can expect substantially higher earnings than their public-company CEO counterparts. However, remember that PE-backed organizations typically face high-performance bars and expectations.
Doubling a company’s revenue or introducing entirely new product lines on a short runway are typical objectives of PE-owned firms. A new CEO must jump in with both feet; they don’t have the luxury of time that a public company CEO may possess.
Executive-minded individuals with an eye toward the top role in an organization might find their footing by working with a PE firm. Typically, the bars to entry are lower, but the PE firm will demand results from its chosen CEO.
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