July 11, 2007

Will Private Equity Firms Be Appearing in Peer Groups?

From Mark Borges’ “Proxy Disclosure Blog” on With all of the recent attention on private equity firms and their eye-popping compensation arrangements, it’s probably only a matter of time before that world begins influencing pay practices in the public company arena. I would expect that many compensation committees at companies with a high-performing CEO are cognizant of the risk of losing him or her to one of these firms looking to recruit a top executive to run one of their portfolio companies. On the flip side, a company looking to hire out of that environment would also have to be sensitive to the market for executive talent in the private equity sector.

This leads to me to ask: at what point will we begin to see private equity firms become part of the peer group analysis that many companies use in positioning their executive pay? I recently saw an article highlighting Comcast’s Compensation Discussion and Analysis, in which the company acknowledged the challenges presented by this new reality:

“The Compensation Committee is also aware that private equity and investment banking firms have become increasingly important competitors for, as well as sources of, executive talent. Many of our current executives are likely candidates for positions at these firms. We recently recruited Michael J. Angelakis, a managing director of Providence Equity Partners, as our new Co-Chief Financial Officer. We could again in the future hire employees at the named executive officer level (and below) from these kinds of organizations. While there is little or no publicly available data on compensation in the private equity market, recent press reports have noted the increasing trend of private equity recruitments from among highly respected members of senior management in high-profile companies – often at significant premiums to traditional public company compensation levels. While the Compensation Committee believes that peer company comparisons remain appropriate benchmarks for evaluating the company’s overall compensation practices, these potential recruiting threats and opportunities have begun and can be expected to continue to have an effect on the company’s compensation philosophy and practices.”

It wouldn’t surprise me to see more companies address this issue in their CD&As next year; and, eventually, to see some of these private firms begin to work their way into the pay analysis; at least for the most senior positions at the largest companies. To me, the challenge will be coming up with reliable data – right now, the numbers are a bit sketchy. But once that happens, it’s almost certain to impact executive pay levels.