Why is Public Company Director Pay Different From Private Equity Pay?

Abstract

Stephen F. O'Byrne

Most institutional investors and their advisors view public companies and private equity as completely separate entities with their own ground rules. Each of these worlds has its own model of corporate director pay: market pay with 60% of pay in annual equity grants for public company directors and “2 and 20” for private equity. Most institutional investors and their advisors seem to believe that there is no practical way to compare the two approaches and little insight to be gained by trying to do so. In this paper, I present an analytical framework that institutional investors and their advisors can use to compare the two models and show that there is great insight to be gained, for both approaches, by comparing the two. I show that private equity pay concepts would provide stronger and more consistent incentives for public company directors but also that private equity fund pay (and public company director pay modeled on private equity fund pay) could be further and substantially improved by adopting the concepts that come out of a model pay plan that provides a perfect correlation of relative pay and relative performance. The perfect correlation pay plan draws on both private equity and public company pay concepts because it provides for fixed sharing – a private equity fund concept – in a measure that isolates management’s contribution to value – a public company executive pay concept.

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