Why do salary negotiations in private equity fail?
Negotiating pay in private equity is challenging. The options are many. Unlike large companies, there’s no standard formula of “fixed plus variable plus car”.
Whereas cash compensation is the focus in many industries, PE managers are driven far more by the chance to share in the value their portfolio companies create.
Various pitfalls can derail these negotiations. Candidates lose motivation and, in the worst case, walk away; the investor finds the demands excessive. Salary negotiations often fail because of:
unclear goals
inflated expectations
the ambition to get (self-confident) top candidates on the cheap
a lack of reliable data on C-level pay in certain industries
differing views of the investment case and the risk
a lack of transparency on the principles of the package (vesting, early departure)
poor negotiating strategy on both sides (!)
Because they commit to an investment for the longer term, future PE managers have to analyse any legacy issues or risks. ESG criteria will soon be added to the mix, making things even more complex (quantification, measurement).
We therefore recommend the following:
1. Define clear goals: for both candidates and investors, it’s essential to communicate clear goals and expectations from the start.
2. Be transparent: openness about the principles of the package builds trust. (The principles should be in place before negotiations begin.)
3. Weigh up the risks: both sides need to balance risk and reward carefully.
4. Think long term: focus on long-term value creation, not just immediate cash. Candidates who don’t make excessive demands for cash have a clear advantage.
How do you deal with the challenges of salary negotiations in private equity? What other reasons for failure do you see? Have you had similar experiences? And how can ethical considerations and value creation be combined in future?
In a future post, we’ll look at the details both sides should focus on in these negotiations.
