As promised, here is the follow up to last week’s survey on CEO Compensation. Thank you to all who participated.
When deciding on a CEO, what do you value more?
Results: A CEO’s Experience earned roughly 75% of votes. Career Trajectory picked up the rest of the votes, whereas Education received no votes.
Explanation: From the results of the survey, it appears that experience has a significant impact on hiring decisions with career trajectory playing a small part. None of the respondents believed that education was the most relevant criteria for a CEO. Recent academic research shows that all three contribute heavily to the total compensation of new CEOs, though from our results it looks like education is more likely to be simply correlated with Experience and Career Trajectory than to be the cause of hiring or compensation package.
When buying a company, what do you prefer?
Results: When buying a company, there is a clear bias towards companies with an established CEO. Only 18% opted to bring in a replacement CEO.
Explanation: Private equity groups seem to have two schools of thought when they’re making acquisitions. Some firms prefer to find companies with solid existing management teams that want to accelerate the growth of their companies. Other firms prefer to find underperforming firms where they can bring in excellent outside talent to turn the company around or improve overall performance. Our survey showed that most groups strongly prefer to buy a strong company already rather than trying to fix a broken one with outside help.
How do you prefer to compensate CEOs?
Results: Earnouts/Equity are the choice payment methods. Just over 10% of participants chose otherwise and expressed interest in paying their CEOs primarily in Salary/Benefits.
Explanation: Some research suggests that CEOs in public companies are compensated nearly 20% higher total compensation those at private companies. Public CEOs also received equity as compensation more often than private CEOs, but generally have shorter average tenures. While this doesn’t seem to match up with our survey results, as our respondents indicated a 4-1 preference for equity/earnout compensation, the academic study shows that when private CEOs have equity, they tend to have more of it than public CEOs. We have noticed a trend, from conversations with Members, that acquirers prefer the management group have some ‘skin in the game’.
How do you tend to align your CEO incentives?
Results: Participants tend to align their CEO incentives with Long Term Equity Building rather than Short Term Financial Focus. 88% selected the long-term choice.
Explanation: While not directly addressing the short run vs long run equity question, one source we worked with looked at how CEOs are compensated based on whether they try to grow through short-term rollup strategies or through longer term, organic growth. The CEOs pursuing significant M&A activities were paid nearly 7% more. One Member we spoke with said that while he prefered longer term, organic growth because it tends to be more stable, he didn’t mind growth using either strategy.
What is the average tenure of a CEO in your portfolio companies?
Results: This last question received the greatest spread in answers. Receiving 59% of the votes indicated that the average tenure of the CEO in their portfolio companies is 3-5 years. There was an even split between a CEO tenure of 1-3 years and 5-10 years, and only 6% voted that their CEO stays an average of less than 1 year. None selected 10+ years.
Explanation: We asked this question because it most directly addressed the article that caused us to run the survey in the first place. The HBS study indicated that 40% of CEOs are gone within 18 months, but apparently that’s not as true in PE portfolio companies where our respondents indicated their average CEO tenure is actually clustered around 3-5 years. It makes sense that none averaged 10+ years, since the average PE portfolio company is held for 3-5 years before being sold