The competition for exceptional portfolio company leaders is fierce. With multiple PE firms often pursuing the same top candidates, structuring the right equity incentive package is critical to land transformational leaders.
The stakes are high. The right executive can dramatically accelerate growth and value creation, while the wrong one—or losing the right one to a competitor—can derail even the most promising investment thesis. To succeed in the war for talent, PE firms must get strategic and creative about how they structure packages. We’ve written before about how to think more holistically about how executive compensation impacts recruitment and retention. Here we dive deeper into the importance of equity incentives as a means to attract ideal candidates while maintaining alignment with their investment objectives.
Designing Packages That Win Top Talent
Different types of leaders require different compensation approaches. A proven public company CEO who’s consistently delivered shareholder returns will have different expectations than an entrepreneurial leader who’s scaled multiple startups. While the most common form of equity packages still generally mandate the complete vesting of an executive’s equity portion upon an exit, PE firms can consider more nuanced approaches to win top talent. Following are some additional ideas on how firms can tailor their approaches:
Attracting Public Company Leaders: To successfully recruit executives from blue-chip public companies, PE firms need to address both the psychological and financial aspects of the transition. While these executives may be intrigued by the potential for greater autonomy and more substantial equity upside as part of a privately held, PE-backed company, they’re also accustomed to predictable annual compensation cycles and liquid equity. Most PE portfolio companies typically offer base salaries at around a 20% discount compared to public company peers—a general rule of thumb in the industry. This reality makes the equity component even more critical—firms must structure packages that clearly demonstrate how equity upside compensates for any initial base salary adjustment.
In our experience helping PE firms recruit leaders, some of the successful strategies we’ve seen address a candidate’s hesitation include:
- Front-loading a portion of the equity grant to offset the loss of unvested public company equity
- Providing clear modeling of potential outcomes at different exit valuations
- Including provisions for interim liquidity events in longer hold situations
Sector-Specific Strategies: Executive compensation strategies should be tailored to both the sector and the specific value creation thesis for each deal. A one-size-fits-all approach to equity incentives often fails to attract the right talent or drive desired behaviors.
In technology and high-growth sectors, for instance, the pace of value creation typically happens much faster than in traditional industries. While a manufacturing company might require three to five years to implement operational improvements and realize significant value creation, a software company might achieve dramatic growth in eighteen to twenty-four months. PE firms should account for this difference by adjusting both the timing and structure of their equity incentives accordingly.
Healthcare and other regulated industries present their own unique challenges in terms of balancing growth and compliance. Firms should consider incorporating both elements into their compensation structures, ensuring executives are incentivized not just for growth, but also for maintaining quality metrics and regulatory compliance. This might mean creating equity structures that include clawback provisions tied to compliance issues or bonus opportunities for successful regulatory achievements.
Platform Strategy: A platform strategy adds another layer of complexity to compensation design. PE firms pursuing buy-and-build strategies need executives who can both operate existing businesses and successfully integrate acquisitions, so their compensation structures should incentivize successful integration of add-on acquisitions while maintaining focus on organic growth and operational improvement.
Successful platform compensation structures often include milestone-based equity grants tied to both acquisitions and organic growth targets. For example, executives might receive additional equity for completing strategic acquisitions within defined parameters, achieving integration synergies, and maintaining core business performance during the integration period. The key is creating incentives that drive disciplined M&A execution without encouraging deal volume at the expense of quality or operational excellence.
There are many other examples of sector- and other situation-specific factors that should be taken into account when trying to land the right leader. The key is avoiding a one-size-fits-all approach, particularly given the importance and impact of C-suite leaders on portfolio company performance.
Core Principles for Equity Package Design
The bottom line here is that effective equity compensation packages need to balance multiple objectives: providing compelling upside potential, maintaining alignment with investment thesis timelines, and addressing candidates’ specific circumstances and concerns. There needs to be a clear connection between performance and reward, appropriate time horizons that match value creation expectations, and enough flexibility to adapt to changing market conditions or strategic priorities. Navigating these complex considerations requires both deep market knowledge and experience in bridging the expectations of PE firms and executive candidates.
Throughout the recruiting process, working with a knowledgeable executive recruiter helps ensure compensation discussions stay grounded in market realities while meeting both the PE firm’s investment objectives and candidates’ expectations. By taking a thoughtful, tailored approach to compensation structure and maintaining flexibility as circumstances evolve, PE firms can significantly improve their ability to attract and retain the transformational leaders who drive successful outcomes.
About the Author
Tom Chinonis is a Managing Director at Townsend Search Group and specializes in representing private equity firms with C-suite placement across middle market and lower middle market platforms across the country. Tom works closely with management teams and investment professionals identifying key leadership for multi-national organizations across wide ranging industries, typically with locations that serve both domestic and global markets. Tom began his career as a corporate attorney specializing in mergers and acquisitions at an AmLaw Top 50 law firm, then served as the CEO in multiple start-up organizations before joining Townsend Search Group in 2021.
