Examining Executive Pay Differences at Public and Private Companies

May 9, 2018

One of the major differences among public and private companies is the quantum of pay for executives. Compensation professionals at private companies are continuously challenged to attract and retain executives when their ability to pay competitively vs. public companies is constrained by typically lower long-term incentive (LTI) opportunities. On the other hand, private company executives don’t face the spotlight placed on their public company peers from shareholders and governance organizations.

This report, using data from Aon’s Total Compensation Measurement® (TCM) database, provides a summary of the main differences in private and public company executive pay. Some of the highlights include:

  • Private company CEO total compensation trails public company CEO total compensation by 80% (the gap is a little smaller for other executives at 66%);
  • Differences in total compensation for CEOs at private vs. public companies decreases as size increases (but the pay gap is still significant);
  • Among other executives, the pay gap is relatively similar across revenue breakout groups; and
  • Pay differences are driven by both usage and magnitude of long-term incentives— virtually all public company executives receive long-term incentives compared to less than 40% of private company executives.

For this report we have broken out results by company revenue. The table below lists the number of companies used in the analysis across revenue breakouts. As shown in Figure 1, private companies are generally smaller than their public peers even when controlling for company size. This means that some of the differences in pay are also reflective of the smaller private company size.

Private vs. Public CEO Compensation

The median total compensation of private company CEOs is 80% less than their public company counterparts. However, this gap decreases as the revenue goes up. Larger private companies (greater than $5 billion in revenue) pay almost half as much as their public peers. The pay gap is slightly smaller for the other executives at about 50% as shown in Figure 2.

What’s driving the differences?

As we stated in the introduction, long-term incentives are the primary driver for the gap in compensation. Almost all the public companies in our database, regardless of size, offer LTI to their executives. On the other hand, only 37% of CEOs and 39% of other executives at private companies received LTI. Additionally, the prevalence of LTI at private companies varies significantly by company size. About three-quarters of large private companies offer LTI compared to roughly one-half of companies ranging from $1 billion to $5 billion. Only around 15% of smaller private companies offer LTI to executives.

Furthermore, long-term incentives are structured very differently for the privately-held companies. While stock-based awards are predominant among public companies, cash-based awards (performance units or PUs) are most common among private companies.

A Closer Look at Pay Mix Differences

Given the generally low prevalence of LTI at private companies, it’s not surprising that their mix of pay is more heavily weighted to cash compensation, whereas the public companies are heavily weighted to long-term incentives.

Despite the lower prevalence of LTI among private companies we find larger private companies still target a higher percentage of pay mix on long-term incentives compared to base salary and bonus as they look to drive focus on longer-term success. The one exception is small private companies where only 8% of total compensation for CEOs is delivered through LTI; recall that their prevalence of LTI is also quite low. This is offset somewhat by a more heavy reliance on bonus at private companies than public ones.

Next Steps

While public company executives clearly earn, on average, higher base salary and target bonus compared to private executives, it is long-term incentives that drive the biggest gaps in pay. We find larger private companies still target LTI in greater amounts than they do base and bonus, but the actual amount of total LTI delivered is much smaller compared to public companies.

Surprisingly, given these substantial differences, private companies are still able to attract and retain executives. This gives credence to the idea that other factors beyond compensation influence where we choose to work.

To learn more about our Total Compensation Measurement (TCM) Survey, which covers compensation data from private and public companies, please contact us

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