- Managers often fail to effectively partner with HR leadership on matters of compensation.
- Per McKinsey, employees who believe their organization offers “differentiated compensation” are three times more likely to find their performance management system effective.
- Hallmarks of a constructive compensation plan include judicious management of fixed costs and intelligently deployed variable compensation.
- A PE-backed CFO must partner across the C-suite and pressure test assumptions prior to any major compensation decision.
PE firms believe every dollar spent must deliver a superior return. Portfolio company executives must embrace that mindset when analyzing the cost-benefit of employee remuneration. An ill-conceived compensation plan stifles progress and acts as a deadweight on enterprise value. An effective plan fast-tracks growth and fortifies alignment.
General expectations for revenue must be defined before compensation planning can begin in earnest. The plan itself must inspire unified pursuit of budgeted targets.
While the compensation plan should undergo a yearly update in accordance with the annual budget; failing to adjust to glaring issues in real-time will actively impede value creation. Extensive utilization of initiative-based awards allows for greater agility than a heavy reliance on base salary.
The Broad 3% Pay Increase is Dead
Uniform COLA raises are no longer a best practice; portfolio companies must be targeted and purposeful in annual salary adjustments.
- Higher base salaries permanently impair EBITDA, making a company less attractive to potential buyers.
- Salary increases are somewhat rigid and difficult to renege once in place.
- The average PE hold length can alleviate pressure to stay ahead of the competitive market in fixed compensation.
In part for these reasons, portfolio company CFOs increasingly utilize performance-based bonuses or awards in lieu of regular merit increases in ba...