The following presentation was featured at the KC CFO Conference. The presentation details the most effective ways to attract, motivate and retain your top talent. For more information visit: https://www.cbiz.com/insurance-hr/services/human-capital-services

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Executive Compensation in Privately Held
Companies: Attracting, Motivating and
Retaining Top Talent
Hal Wallach
December 1, 2016

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Agenda
• Setting Pay Philosophy
• Pay for Performance
• Annual Incentives
• Long-Term Incentives
• Employment Contracts
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3. 3
Setting Pay Philosophy

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Key Questions in Setting Compensation Strategy
What is the market for
determining our
competitive positioning
(e.g., industry, size,
location, for profit and
non-profit)?
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How will we position
compensation levels against
the defined market (e.g.,
market median,
above/below market, fixed
versus variable pay)?
2
What is the right mix
between fixed and variable,
short-term and long-term?
How do compensation and
other elements of total
rewards complement each
other?
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What is the right linkage
between performance and
pay?
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Compensation Market Depends on Several Key Factors
• Industry
• Company size
• Revenue (assets for financial organizations)
• Rule of thumb: ½ to 2x
• Ownership structure (e.g., private vs. publicly held)
• Location
• Other factors can include: historical performance,
economic conditions, business strategy, organizational
reputation
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Positioning Pay Relative to the Market
• Default positioning typically at predetermined range
above/below median of defined market
• Positioning above or below market often due to
compelling business reason(s)
• Above market: Company can yield high returns on
incrementally better talent, or company is relatively risky place
for employees to work, or company pay mix emphasizes “at-
risk” (e.g., annual / long-term incentive) pay
• Below market: Company can attract top talent due to non-
monetary rewards
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Impact of Company Life Cycle on Pay
• Pay positioning (and mix) often influenced by
business life cycle phase. Example:
Relative To Market
Salary /
Bonus
Long-Term
Incentives
Benefits /
Perquisites
Business Life
Cycle/Phase
Start-Up Below Above Below
Growth Near Market
At or Above
Market
Average
Maturity At Market At Market At Market
Renewal
At or Above
Market
At or Above
Market
At or Above
Market
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Pay for Performance

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Measuring Performance – Beyond Just Financial
Strategic
Leading indicators
Tend to be qualitative
Basis for management
decisions
Examples
Customer satisfaction
New product sales
Cross-selling
Market share
Operational
Leading or lagging indicators
Quantifiably measured with
enhanced line-of-sight
Examples
Quality
Safety
Productivity
Cost reduction initiatives
Financial
Lagging indicators
Quantifiable
Reflects results/progress to date
Captures economics of the business
Examples
Revenue / sales
Profit (gross, operating, net, EBIT)
Margin (gross, operating, net)
Return on assets (gross, net)
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Picking the Right Measure(s)
• Most companies have one “key” measure (with
others to support it); an effective key measure should:
• Recognize the organization’s capabilities and people, and
provide senior management with a singular performance focus
in support of the company's business strategy
• Reflect the external dynamics of the industry and the
economics of the business
• Correlate with ownership value creation
• Be fairly easily determined from accounting numbers and the
company's financial systems ‒ simple to calculate and
communicate
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Determining the ‘Right’ Level of Performance
• Performance goals should be meaningful…and
achievable
Meaningful Achievable
Aligned with Ownership Value
Creation
Reasonable, given competitive market
environment
Sufficient "stretch" required for
upside rewards
Perceived by participants as
attainable, especially at "threshold"
Calibration between performance
required and pay expected
Linked to realistic budgets
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Annual Incentives

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Objectives
• Provide variable, performance-based pay
• Provide competitive cash compensation opportunity
• Control fixed costs (salaries)
• Support/reinforce the business strategy, company
culture and core values
• Clarify roles and responsibilities
• Motivate specific behavior and reward results
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Design Issues
• Incentives vs. bonuses
• Results vs. efforts
• Team vs. individual
• Influence vs. control
• Participation
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Common Funding Approach Using Single Performance Measure
0%
50%
100%
150%
200%
250%
Threshold (80%) Target (100%) Maximum (120%)
Incentive
Earned as a
% of Target
Performance Results
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Common Funding Approach Using Two Performance Measures
Earnings
Growth
Revenue Growth
Incentive Funded as a % of Target Pool
20% 100 120 140 160 180 200
17% 80 100 120 140 160 180
14% 60 80 100 120 140 160
11% 40 60 80 100 120 140
8% 20 40 60 80 100 120
<8% 0 20 40 60 80 100
<6% 6% 8% 10% 12% 14%
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Allocating Performance at Various Organizational Levels –
Example Approach
CEO/COO 100% 100%
Other Tier 2 - Corporate 60% 20% 20% 100%
CFO 75% - 100% 0% - 25% 100%
Tier 3 - Corporate 50% 25% 25% 100%
Tier 4 - Corporate 25% 25% 50% 100%
Division President 25% - 50% 50% - 75% 100%
Tier 2 - Division 20% 40% 20% 20% 100%
Tier 3 - Division 34% 33% 33% 100%
Tier 4 -Division 25% 40% 35% 100%
% of award tied to Performance of
Position/Level Corporate Division Function Individual* Total
* Includes team and/or department measures
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Long-Term Incentives

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Objectives
• Similar to annual incentive plans
• Performance measured over a period greater than
one year
• Three to five years most common
• More emphasis on achieving goals that support a company’s
long-term strategy
• Stronger link to ownership value creation
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Market Practice
• Not surprisingly, long-term incentives (LTI) are less
prevalent in private (non-publicly traded) companies
• In a recent WorldatWork survey of privately held companies,
just over half of respondents indicated they had an LTI plan
• This compares with over 95% for publicly held companies
• Lower prevalence often attributable to
• Preference of ownership to avoid equity dilution, thus
requiring additional outlay of cash
• Plan designs can sometimes be complex, making plan
administration and communication difficult
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Market Practice
• Majority of LTI Plans in privately held companies are cash-
based
• Overwhelming majority of companies (79%) have only one
plan (versus multiple plans in publicly held companies)
LTI Plan Prevalence
Long-Term Cash Plan 44%
Stock Option 30%
Restricted Stock 22%
Phantom Stock 14%
Performance Units 11%
Stock Appreciation Rights (SAR) 9%
Performance Shares 6%
Source: WorldatWork and Vivent Consulting – Incentive Pay Practices Survey: Privately Held Companies
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Plan Definitions
Plan Type Plan Description
Stock Option
A contractual right granted by the company to purchase a specified number of shares of the
company's stock at a specified price (the exercise price) for a specified period of time
Restricted Stock
Grants of shares of the company's stock subject to restrictions on sale and risk of forfeiture until
vested by continued employment
Performance Shares
Grants of actual shares of stock with payment that is contingent on performance as measured
against predetermined objectives over a multi-year period of time; same as performance units
except that the value paid fluctuates with stock price changes as well as performance against
objectives
Performance Units
Grants of dollar-dominated unites with value that is contingent on performance against
predetermined objectives over a multi-year period of time. Actual payouts may be in cash or stock
Long-Term Cash Plan
Cash awards where payment is contingent on performance as measured against predetermined
financial or strategic objectives over a multi-year period of time (typically 3 years)
Phantom Stock
A type of incentive grant in which the recipient is not issued actual shares of stock on the grant
date but receives an account credited with certain numbers of hypothetical shares. The value of
the account increases or decreases over time based on the appreciation for depreciation of the
stock price and the crediting of phantom dividends. Payout may be settled in cash or stock
Stock Appreciation Right
(SAR)
A contractual right that allows an individual to receive cash or stock of a value equal to the
appreciation of the stock from grant date to the date the SAR is exercised
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Plan Design – Performance Measures
• According to published survey sources, common long-
term incentive performance measures include:
• Profitability
• Net Income, Earnings Before Interest & Taxes [Depreciation &
Amortization] – (EBIT, EBITDA), Net Profits After Taxes
• Annual Sales/Revenue
• Return
• Return on Assets or Equity (ROA, ROE)
• Economic Value Added (EVA)
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Plan Design - Vesting
• Vesting period definitions:
• “Cliff”– 100% vested after a specified period of time
• “Installment” – portion vested each year after grant
• Typical vesting period is three to five years (cliff or
installment)
• Vesting upon retirement:
• To encourage a successful transition and continuity of the
organization, many organizations are setting vesting in the
event of retirement at a date in the future (e.g., one year after
retirement date) rather than automatic full vesting at
retirement
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Plan Comparisons
• The tables on the following pages provide high-level
details/comparison of the most common long-term
incentive plans in use today
• Information provided includes
• Plan description (including typical vesting/performance
periods)
• Accounting treatment
• Company and employee tax treatment
• Pros and cons of each (e.g., dilution, cash requirements, link to
pay, etc.)
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Non-Qualified Stock Options
Employer Employee
Aligns shareholder and
employee interests
(value entirely based
on increase in stock
price)
Requires higher
number of shares to
provide the same
value relative to other
LTI vehicles
Easy for employees to
understand and keep
track of value
Broad stock market
performance may
impact stock price (up
or down) beyond
employees' efforts or
contributions
Subsequent
appreciation in
stock price not
charged to
earnings
Future sale of
stock considered
capital gain (tax
basis is FMV upon
exercise)
Once vested, provides
employees flexibility to
choose when to
exercise options and
recognize income
Pros Cons
Tax Consequences
Definition /
Description
Typical
Vesting or
Performance
Period
Accounting to
Company
Right to
purchase
(exercise)
shares of a
company's
stock at a
stated value for
a defined
period of time
(typically 10
years).
Exercise price
is typically the
fair market
value (FMV) on
date of grant
Accounting
charge fixed at
grant and
expensed over
vesting period
Deduction at time
of exercise equal
to FMV of shares
upon exercise in
excess of grant
(exercise) price
Taxable income
recognized upon
exercise equal to
FMV of shares
upon exercise in
excess of grant
(exercise) price3 - 5 years
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Restricted Stock
Employer Employee
Aligns shareholder and
employee interests
while promoting a
more immediate sense
of ownership
May provide value
even if company stock
price declines (or
performs below the
market)
Supports stronger
retention than options
since value is not tied
wholly to increases in
stock price
May incent less risk
taking than options
If stock
appreciates,
company's tax
deduction exceeds
fixed accounting
charge
Future sale of
stock considered
capital gain (tax
basis is FMV upon
vesting)
Fewer shares typically
required to produce
same level of pay as
stock options
Definition /
Description
Typical
Vesting or
Performance
Period
Accounting to
Company
Tax Consequences
Pros Cons
Outright grant
of shares with
restrictions on
when they can
be sold or
transferred
Accounting
charge fixed at
grant and
expensed over
vesting period
Deduction equal to
FMV of stock upon
vesting
Taxable income
recognized equal
to FMV of shares
upon vesting
3 - 5 years
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Performance Shares
Employer Employee
Deduction equal to
FMV of shares
when earned
Taxable income
recognized equal
to FMV of shares
when earned
Strong link of pay-to-
performance. Value
tied to both achieving
multi-year performance
goals as well as stock
price
May provide value
even if company stock
price declines
Fewer shares typically
required to produce
same level of pay as
stock options
Requires effort to
select appropriate
performance
measures and levels
over multi-year
periods
Popular plan among
shareholders and
proxy advisors
Pros Cons
Grant of
shares which
only vest (are
earned) upon
attainment of
pre-defined
performance
goals over a
multi-year
period
3 years
Future sale of
stock considered
capital gain (tax
basis is FMV upon
vesting)
Variable
accounting
(quarterly profit
& loss
fluctuations
based on
performance
against goals)
Definition /
Description
Typical
Vesting or
Performance
Period
Accounting to
Company
Tax Consequences
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Cash-Based
Employer Employee
Deduction when
amounts
earned/paid
Taxable income
recognized when
award earned/paid
No stock dilution since
awards paid in cash
No (or smaller) link
between shareholder
and employee
interests since
performance goals not
typically linked directly
to stock price
performance
Promotes employee
focus on company
strategy and
performance beyond
one year (vs. annual
incentives)
Requires effort to
select appropriate
performance
measures and levels
over multi-year
periods
Cash payments
required
Definition /
Description
Typical
Vesting or
Performance
Period
Accounting to
Company
Tax Consequences
Pros Cons
Opportunity to
earn a cash
award based
upon
attainment of
pre-defined
performance
goals
measured over
multi-year
period
3 years
Variable
accounting
(quarterly profit
& loss
fluctuations
based on
performance
against goals)
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Employment Contracts

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Employment Contracts - Objectives
• Companies generally enter into employment contracts
only with their most senior executives. Provisions
commonly found in employment contracts include:
• Term of contract and provisions for renewal
• Specific duties and responsibilities
• Compensation
• Benefits/perquisites
• Upfront/signing awards
• Termination (e.g., severance benefits and outplacement
assistance)
• Special change-in-control provisions
• Non-compete, non-solicitation and confidentiality provisions
• Dispute resolution
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Employment Contracts - Objectives
• Contracts have become more prevalent, with nearly half of all
major companies reporting having contracts with one or more
executives
• CEO and a few direct reports most likely to have contracts
• Anecdotally, common reason given for having contracts is to
"formalize" employment relationship
• New hires asking for contracts
• Most important element of most contracts involves setting
forth termination provisions
• Most common amount for executives is one year of salary
• Severance generally based on salary only
• Full or partial COBRA subsidy is common
• Common to offer outplacement services
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Questions?
Hal Wallach
Director
Executive Compensation Consulting
CBIZ Human Capital Services
314-692-5819
hwallach@cbiz.com
CBIZ Human Capital Services is a business and financial advisory firm providing a vast array of services,
including compensation consulting. Our professionals perform compensation valuations on a regular basis and
are qualified to provide such.
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Hal leads CBIZ Human Capital Services’ Executive
Compensation Consulting practice.
With more than 25 years of experience, he helps
management teams and boards of directors create and
institute executive compensation programs that attract and
retain top leadership, adhere to regulatory requirements,
and drive maximum return on compensation investment.
He previously served as an adjunct professor at Washington
University in their Executive MBA program where he led
classes on executive compensation.