Case Study 1: Private Company Ownership Analysis
Background
CGP was retained as a subject matter expert to consult on the reasonableness of total compensation for a private company’s CEO over the previous 20+ years.
There were two key factors that informed our approach to assessing reasonableness:
Firstly, the CEO was not eligible for any ownership in the company upon assuming the role, and the company continued to be owned entirely by the family. The organization’s value increased to over 20 times its original value, but the CEO did not share in the organization’s growth in the same manner as a publicly-traded CEO. As such, any discussions about this CEO’s compensation should also account for the lack of direct ownership in the company he runs.
Secondly, the CEO was not a typical third-party external hire. The company in question was a family-owned business, and the current CEO was the son-in-law of the founder. Upon the founder’s death, the current CEO was directly requested by the previous CEO’s widow to assume the role. As such, the CEO was a related party to the family, which would normally result in higher levels of ownership and different approaches to compensation compared to CEOs of publicly-traded companies.
Analysis
After developing our understanding of the organization, business model and historical context, we determined that the most appropriate methodology would be the following:
Analyze typical equity ownership levels for private company CEOs;
Determine the growth of the organization during the current CEO’s tenure; and
Calculate the theoretical value a similar CEO would be entitled to as a result of their ownership in a company that experienced the same growth
To supplement the ownership analysis, we conducted a standard compensation benchmarking and ownership analysis using several comparator groups composed of publicly-traded organizations within the same industry, selected based on the size of the organization at varying points in time.
Outcome
We issued an expert opinion letter, stating that the results of our analyses revealed that based on the typical levels of ownership and the organization’s growth, the total compensation received by the CEO over the previous 20+ years was reasonable when accounting for his lack of ownership.