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QUESTION:  What is the relationship between cash compensation for executives in privately-held versus publicly-traded companies? If I am administering compensation for a privately-held firm, is the public firm data relevant or should I avoid it as well as blended data?

 

The Salary Assessor and Executive Compensation Assessor databases do not provide executive pay data broken out for "private" or "public" companies. The data reported in most individual executive salary surveys is also usually a blend of both privately-held and publicly-traded companies. There is a perception among some compensation professionals that a statistical difference exists in the cash compensation of privately-held and publicly-traded companies' executives; however, ERI has not been able to establish a normal "rule of thumb" in terms of cash compensation. Our experience is that, where careful analysis has rendered no evident pattern, there is no general rule for private companies paying more or less than public companies in cash compensation. The market for US executive talent has traditionally been national and is now growing more and more global. Both private and public firms are competing to attract, retain and motivate from the same pool of executive talent and, therefore, must pay competitively and according to other classifications (industry, company size, etc.), rather than according to their status as private or public. Likewise, in the terms for defensibility of maximum reasonable executive compensation, as defined by the Internal Revenue Service, no "allowances" are made for a company being privately-held or publicly-traded.

 

Like many compensation professionals, we have found the wording in some private firm surveys to be somewhat misleading on this matter, perpetuating the above misconception that private firms pay more or less than public firms. As an example, one survey source states in the introduction:

 

In general, there appears to be a noticeable difference in cash compensation received by CEO's at publicly traded companies compared to their counter parts at privately held companies...On average the CEO's of publicly traded companies received about 40% more in total direct compensation...One reason for this spread of total cash compensation is that the average annual sales were greater for publicly traded companies than for privately held companies. The average annual sales for publicly traded companies was $64 million, while the average annual sales for privately held companies was $22 million.

 

The above quotation does not substantiate that a difference in pay is driven by whether the company is privately-held versus publicly-traded; rather, it illustrates that executive pay is a function of company size (in this case, revenue) and that privately-held companies are generally smaller than publicly-held companies. When sales size, profits, industry, etc., are held constant in our analyses, the supposed differences disappear.

 

The private versus public question does come into play in the areas of non-cash compensation (e.g., stock options and retirement benefits). The Executive Compensation Assessor database presents this information for publicly traded companies.  However, as non-cash compensation information is not available for privately-held companies, ERI is unable to analyze the non-cash compensation differences between privately-held or public-traded companies.