Private Equity Reward Insights: The Pressures and Solutions to Remain Competitive in 2022

With Private Equity seeking to outperform and remain buoyant in a volatile market the need to recruit and retain the best leadership talent has never been more critical.

That said, there are a number of pressures which are creating the need for companies to make a shift in how they support the development of strong talent, with reward being central to this process.

The Pressures

Global talent shortage

One of the core challenges is the global talent shortage for both C-suite and senior leadership teams across most industries and functions which is creating a real headache for PE firms. The pandemic has shown the need for strong, agile and transformational leadership which can drive strong coherence across the management team – all of which are in high demand.

Linked to this is the lack of diversity across leadership teams within the PE arena. Reports by McKinsey & Company have continuously shown the benefits of improving DE&I, which will not only provide additional opportunities for financial outperformance, but DE&I commitments will also help support in raising capital as Limited Partners (LPs) seek to ensure this is a key part of the financial due diligence.

Rising salaries

The pandemic has also impacted the time to exit, with many organisations having to lengthen their hold period, establishing a longer wait time for equity to be released. This, coupled with enhanced remuneration packages at the next tier of management due to the greater negotiation powers from a candidate led market, has the ability to create a reduced pay gap with their C-suite counterparts in the short term given that equity is still king at this level, with the potential for instability and some unsettledness.

The rising significance of ESG & DE&I

Investors and LPs are increasingly setting a much higher bar on ESG & DE&I criteria which is putting pressure on the capital supply chain from above. This is only going to continue at pace given the outcomes from COP26 with UK businesses given a 2023 deadline to show plans for net zero. Companies that embrace the benefits of ethical and sustainable business values are set to be more resilient and therefore more “saleable” in the future. Equally, pressure is growing from below as people take more consideration of a company’s standpoint and commitment around ESG and DE&I when looking for their next move. Ethical investment and the importance of being a sustainable and inclusive business is not just coming from above, but from employees, potential candidates and customers. These push and pull points are creating a growing expectation that Executive teams will lead from the front, with reward playing a vital part in how these themes can be addressed.

So how can these pressure points be tackled from a reward perspective?

The need to reassess & understand

By understanding the external reward environment and therefore the candidate expectations, PE backed companies can ensure that in a candidate led market they can compete more effectively first time. Iain Ferguson, a Portfolio Chair of multiple private equity backed businesses, is seeing this first hand, stating that “the competition for talent, and the need for organisations to distil and offer compelling reasons to be preferred over others, is already fierce and becoming more so. Value is created where talent is able to thrive – so understanding reward, in the financial, personal and wider sense, can provide a critical advantage”.

Strengthening the financial due diligence at the beginning of the PE journey by having a true understanding of the external remuneration landscape at the start and what the pay environment might look like on exit for both C-suite and wider leadership roles will also help support loyalty, build stronger succession plans and ensure greater alignment with the PE investors. Having a strong reward strategy at all levels can also help support a robust growth journey by keeping employees motivated during and after the full equity life cycle to ensure that staff are appreciated and recognised for their efforts.

Creating more defined performance measures around ESG & DE&I

ESG is set to be a growing consideration for setting Executive Remuneration across PE portfolios – a trickle effect from the FTSE100 where according to analysis, 45% of FTSE 100 companies currently have an ESG measure in either their annual bonus targets or their long-term incentive plans. Diversity is also a key area where this is happening, with growing pressure from investors and other groups to focus on these current trends such as sustainability, DE&I and climate change with remuneration playing a vital part building greater accountability in these areas.

Building a more inclusive culture with benefits that are fit for purpose

In addition to supporting DE&I from top down, building a framework at a local level and throughout the organisation will enhance the organisation’s culture as well as support the attraction and retention of a diverse workforce. This can look at aspects such as unconscious bias and inclusion training, reviewing internal employee benefits such as healthcare, wellness and flexible working, as well as committing to regularly collecting and analysing internal data on diversity etc. In addition, reviewing and enhancing the recruitment processes to be more inclusive is vital, ensuring the use of unbiased language, with a focus on recruiting and retaining from the widest talent pools. To build a more inclusive culture, the principles of inclusion need to be embedded within areas such as appraisals, leadership training, the approach to team management, discrimination and harassment policies and social policies for example.

Strengthening Governance

Given the push and pull factors described here, portfolio companies are increasingly requiring more proprietary and governance insight to help navigate these external pressure points. This is not to flatten growth, but to enhance an organisation’s ability to challenge, innovate and meet new regulatory demands. Wider aspects around environment, sustainability, community and social impact are becoming more important for all parties and having the right reward strategy can help support a company’s ambitions, as well as enhance its credibility, values and priorities. For more mature entities, an increasing trend is the development of a Non-Executive Board and/or Independent Advisors, with informal or formal Remuneration Committees which can bolster management teams and provide challenge and advice around Executive remuneration, ensuring it is aligned, competitive and fit for purpose.

The need to benchmark

Henley Reward Consulting supports clients in making informed decisions around remuneration, reward and D&I policies. This is not generic salary data which can often be frustrating given the findings may not be relevant for your business based on numerous factors (size, scale, location, job size etc.), or indeed not detailed enough to make considered strategic outcomes. Given the pace of change in the market the need to ensure you have a true understanding of what is happening around not only Executive and Senior Leadership pay, but wider remuneration and reward strategies is going to be crucial to attract and retain the best talent. Benchmarking provides a baseline in terms of designing reward strategies including equity provision and variable pay structures, as well as setting expectations for all relevant parties around what is appropriate based on numerous business-led factors. By understanding the reward environment and candidate expectations, PE backed companies can ensure they can compete and retain the right talent first time. In addition, by having this clear remuneration plan, with evidence the organisation is able to attract the best talent and incentivise well along the way to support a high performing Executive Team will certainly help to enhance the value of the business upon exit.

Henley Reward Consulting

At Henley Reward Consulting our benchmarking provision:

Supports PE firms and management teams in creating a strong attraction and retention strategy for wider leadership roles that may not have equity as a core motivator.
Supports succession planning for LBOs and IPOs by providing an understanding of remuneration packages on commencement and on exit.
Provides clear insight into short, medium and long term pay and performance mechanisms for both C-suite and wider leadership roles, as well as how structures are evolving in the wider market.
Delivers intelligence around best practice, ESG and D&I mechanisms.

For further information, please contact Louise Haines, Managing Director at Henley Reward Consulting on louise.haines@henleyrewardconsulting.com or +44 (0)7798630382.