A Fresh Look at Incentive Plans for Privately Held Companies

Abstract

Private companies are very differnt in certain aspects from theri public ounterparts. IN additon to fewer regulatory and disclouser requirements, they also have very distinct goverance, culturea, and mangament system characteristics, which results in very difernt compensation practice. One primary distinction highlighted in a recent Willam M. Mercer survery is praivte companies's conseratives use of long-term incentives. This is partly because tyical public company long-term incentiv vehicles, such as stock option and resturcted stock, often do not work as well in a private company setting. As alternatives, private companies have traditionally relied upon perfonace units and phantom stock plans for ther long-term incentives programs. These plans designs, however have major deficiencies. Consequently, two emerging long-term incentive approaches, value added plan designs and incentives based on econmic value management, may be ore appropriate for private companies.