Board considerations for private company LTI programs

Forms of private company governance

Compensation governance at private companies can differ greatly depending on ownership structure and is best described as a spectrum. On one end of the spectrum, there are private companies, usually larger and more sophisticated, that operate much like public companies from a governance perspective. These organizations often choose to align their oversight practices with their public company peers, including maintaining a written charter and annual calendar for decision-making.

On the other end of the spectrum, there are closely held organizations with boards that serve family ownership, for example, and operate more like an advisory committee than a true board of directors. In these cases, the board may lack the fiduciary and broader governance responsibilities of a public company board.

Formalized private company boards are more likely to play a greater role in the company’s executive compensation administration than governing bodies that serve primarily in an advisory capacity. These more sophisticated boards will often maintain a compensation committee, much like their public company peers, comprised of several non-employee board members who are charged with oversight of the company’s executive compensation programs. Private company boards with compensation committees tend to have the best line of sight into executive compensation and inherently have more authority in executive pay administration than advisory or “patron” boards.

Regardless of the board’s level of authority and oversight, senior management plays a key role in shaping executive compensation programs. Whether reporting up to a compensation committee, full board of directors, or directly to a closely held shareholder group, senior leadership tends to be the strongest advocate for how executive pay will be delivered. The CEO, with support from the CFO, COO, General Counsel and Chief HR Officer, will typically provide proposals and perspectives to the board or governing body on how the executive team will be compensated. Annual pay decisions that are often influenced by management include merit-based salary increases, bonus payout amounts and incentive plan performance metrics.

For many private companies without long-term incentive offerings, it is often senior management who drives the initial adoption of a long-term incentive program framework. Senior management tends to be the first to recognize any concerns related to attracting and retaining key talent. This may be communicated to the governing board, among other relevant factors, in support of providing long-term incentive opportunities to leadership. In addition, senior management will often work directly with outside advisors, including compensation consultants, legal counsel and third-party administrators to develop and formalize a long-term incentive program (LTIP).

Four common board-level debates

As private companies explore the implementation of LTI arrangements, a familiar set of strategic debates often emerges, with some additional consideration depending on the composition of the Board of Directors, as well as governance model. These discussions serve not only to shape the company’s approach to compensation and performance alignment but also act as a diagnostic tool for the board itself.

By surfacing these topics, directors gain insight into each member’s level of understanding, identify areas where further education or resources may be needed, and strengthen the board’s capacity to provide effective oversight. Ultimately, these conversations should be designed by the Board to guide executive behavior, reinforce accountability, and ensure both short-term and longer-term incentives are aligned to the company’s vision.

1. Does the LTIP support our ownership model and long-term strategy? The effectiveness of any new or updated LTI hinges on its alignment with the company’s overarching strategic objectives. Ownership structure plays a pivotal role in shaping this alignment. For instance, private equity-backed firms often prioritize value creation and exit readiness, necessitating LTIPs that emphasize equity appreciation or milestone-based payouts. In contrast, closely held or family-owned businesses may focus more on long-term sustainability and cultural continuity, favoring retention-oriented incentives. Ultimately, the role of executives also influences LTIP design and the incentives that reinforce accountability and growth. This may be the most challenging aspect of this debate for private company boards, as these leaders are typically tasked with both facilitating strategy sessions and executing the vision.
2. What behaviors and outcomes should the LTI drive? A well-crafted LTIP should drive behaviors that align with both performance expectations and values. This may include fostering a sense of ownership, encouraging long-term thinking, and reinforcing collaboration. Boards will also debate eligibility criteria and will need to carefully consider participation to ensure the plan motivates key contributors without diluting its impact. When it comes to debating outcomes, performance metrics should be transparent, measurable and tied to strategic outcomes such as EBITDA growth, revenue milestones, or operational efficiency. Finally, payout mechanisms and timing should enter the debate, whether time-based or performance-based, as there is typically a need to balance near-term rewards with the level of required performance, while remaining competitive with market benchmarks.
3. How do we govern the LTIP to ensure fairness, flexibility, and risk control? Robust governance is essential to safeguard the integrity of an LTIP. This includes implementing risk mitigation strategies such as scenario modeling to manage downside exposure, as well as payout caps and clawback strategies. Governance structures should clearly define the balance between formulaic and discretionary elements, ensuring consistency while allowing flexibility in exceptional circumstances. Careful selection of strategic outcomes can reduce the potential for overlap with short-term incentives. This aspect of the debate must be carefully managed to avoid conflicting signals and ensure that longer-term goals remain the focus.
4. How should we tailor LTIP structures to fit our ownership model and capital strategy? Different ownership models necessitate different incentive structures. In private equity environments, phantom equity or stock appreciation rights may be preferred to align with exit valuations and liquidity events. Conversely, in closely held entities, cash-based LTIs or deferred compensation plans may be more appropriate, offering predictability and alignment with conservative capital strategies. The choice of incentive vehicle should reflect the company’s capital structure, growth trajectory, and cultural priorities, ensuring that the LTIP is not only motivational but also sustainable and strategically coherent.