Recruitment and Compensation of Private Equity CEOs

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Fewer than 30 percent of new CEOs at S&P 500 companies over the last few decades were hired externally and only 20 percent were complete outsiders. Some have concluded that this suggests a limited market for CEOs. Little research, however, has studied the market for CEOs of private equity funded companies. In The Market for CEOs: Evidence from Private Equity (NBER Working Paper 30899), Paul A. GompersSteven N. Kaplan, and Vladimir Mukharlyamov address this gap by studying the market for CEOs using a sample of 192 private equity funded buyouts in the US worth more than $1 billion between 2010 and 2016. They find very different results from those for public companies. More than 75 percent of new CEOs were external hires, and more than 65 percent were complete outsiders. The most recent experience of 67 percent of the outside CEOs was at a public company, including 32 percent at an S&P 500 company. Almost 50 percent of the external hires have some previous experience at an S&P 500 company. This suggests there is an active market for CEOs that crosses the boundaries between publicly traded and privately financed firms.

More than 75 percent of new CEOs hired to run private-equity-funded companies are external hires, compared with only 28 percent of new CEOs at S&P 500 companies.

The researchers go on to estimate how the private-equity-funded CEOs are compensated compared to public company CEOs. They use two pieces of information to estimate compensation. First, they measure the performance of the buyouts in their sample. The median buyout earned 2.5 times its equity investment. Second, they assume the cash compensation and equity incentives for CEOs are similar to those of CEOs of the sample buyouts that returned to public ownership through initial public offerings. Combining that information, the researchers estimate that the private-equity-funded company CEOs earned significantly more total compensation, roughly twice as much as CEOs of similar-sized public companies.

Overall, the results suggest that the broader market for CEOs is active and that, at least for private equity-funded portfolio companies, firm-specific human capital is relatively unimportant. The compensation results indicate that public company executives have viable outside options. Finally, the findings suggest that one cannot necessarily generalize the results for and inferences from publicly owned companies to all companies.

—Linda Gorman