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Private Vs. Public CEOs: Putting Some Skin In The Game

Private-company CEOs say that when it comes to their pay and that of their public counterparts, it isn't even close -- and sometimes it's even twice their take-home. But it's also a reflection of a highly visible, intense position.

That's what industry insiders say the difference is between the stock-option-fueled pay packages for CEOs running publicly held Solution Provider 500 companies vs. the more modest pay for top executives running privately held IT services companies.

Ron Dupler, CEO of GreenPages Technology Solutions, the Kittery, Maine-based company that won CRN's SP500 2012 Company of the Year award, said the pay packages for CEOs running publicly held companies scale much more dramatically.

"When you get into the publicly held world you are in a much different place," said Dupler, noting the intense focus on CEO compensation. "When you get into the public realm these guys' butts are on the line day in and day out. It is a highly visible position. The packages scale dramatically as a reflection of that."

In the privately held SP500 world, a number of the companies are still headed up by founders who sometimes simply draw compensation from monthly or quarterly cash flow. How well the founder/CEO is compensated depends greatly on rigorous financial controls and balance sheet discipline. What's more, many founders/CEOs make lifestyle decisions as they get older that significantly impact pay, including moving higher sums into retirement packages.

Several privately held CEOs said their total compensation is not even close to the total compensation for CEOs running publicly held companies. When everything is added up, including stock options, the compensation for CEOs running comparable publicly held companies often comes in at more than twice the pay of privately held CEOs, they said.

"In publicly held companies there is a spirit of entitlement with regard to CEO compensation," said one top executive for an SP500 privately held company, who did not want to be identified. "The CEO says, 'I should make X whatever X is,' and typically compensation committees will reverse-engineer the compensation methodology to get to that number. Private companies can't do that. It is the ultimate meritocracy. If you don't make it, it is not there to take."

Beyond that, the CEO said the big difference is that it is a "lot easier to spend someone else's money" -- namely public shareholders -- than your own money. "In privately held companies, spending is controlled," the CEO said. "Everything needs to be in balance. It is your money. It is real money. When you are a public company, it is the shareholders' money."

Furthermore, compensation in privately held companies is highly dependent on just how active the board of directors is. Some boards reach out to seasoned CEOs for help as the companies grow.

Dupler, for example, was hired by the GreenPages board of directors in 2004 as the company moved to drive more aggressively into professional services. The appointment came after Dupler spent five years as CEO of Amherst Technologies, driving the systems integrator's sales up some 600 percent to $398 million. Dupler said his pay package at GreenPages is determined by "revenue growth, value creation and, certainly, profitability metrics."

As to the stark difference between privately held and publicly held CEO pay packages, Dupler said the question "strikes at the very fabric of corporate America" in an age where CEO compensation, particularly in the financial services industry, has come under fierce criticism.

Ultimately, Dupler said the "market” dynamics of supply/demand are driving executive compensation. And when you compare publicly held CEO compensation packages to those of professional athletes and movie stars, suddenly the CEO pay packages "don't look so ridiculous," he said. "I really think the market [law of supply/demand] sets the [compensation] for the job. When you are a member of a board of directors for a public company trying to hire the right talent to run the company, those [pay] packages probably pale in comparison to what is at stake based on these guys doing a good job or not," said Dupler.

There is data available from compensation experts tracking private and publicly held companies showing the striking difference in pay, according to Dupler. "Certainly, a private company is not looking at [much higher] public company comparisons," he said.

Jim Dixon, president and CEO of CompuCom Systems, a $2.3 billion Dallas-based technology services company owned by private equity company Court Square Capital Partners, said one of the problems for SP500 companies is finding comparable entities.

"It is hard to find somebody out there that has got a comparison to us, especially in the VAR business," he said, noting the vast differences in gross margin and outsourcing sales vs. product sales. "You may have a lot of revenue, but not much gross margin. But you need to compare it on gross margin. Revenue is not the number that is key."

To that point, CompuCom has aggressively built out its services business under Dixon's leadership. "The product margin has gone down drastically," he said. "That's one reason we switched to an outsourcing model because we like recurring revenue. And recurring revenue will hold up in good times and bad times.

"You have got to have some data to compare it to," said Dixon of the executive compensation dilemma. "There is a lot of data there. The question is: 'Is it exactly what you are doing?'"

Dixon said the secret to sound senior management compensation at CompuCom has been a mandate that the senior management team invest their own money in the business. "They put cold hard cash in," he said. "Not [stock] options. When they put that cash in, they have a vested interest. And they get paid back a nice sum if we all profit.

"We believe in skin in the game," added Dixon. "They put their money in, and they own a significant part of it. And it has got to be big enough to where they are committed. We all think like owners. And there is a difference between an owner and an employee."

As to his views on making sure that CompuCom does not lose talent to much larger publicly held services companies with deeper pockets, Dixon said ultimately he looks at "when somebody makes an offer to them, quite frankly, are we competitive? Can we keep them? And it is a combination of salary and bonus and equity in the company. It can't be just one."

Keeping salespeople may become a bigger issue at both privately held and publicly held companies with recurring revenue cloud computing business models taking hold, said Ken Thoreson, president of Acumen Management Group Ltd., Vonore, Tenn.

"Because of business pressures on cost and especially with the cloud, the costs of sales changes, margin changes, so compensation plans are changing," said Thoreson. "It's all based upon the strategy that the board or the CEO has set. What I have seen is that a lot of money is being plowed back into the business because of the investment around cloud, marketing and other costs associated with legacy systems."

A big issue for CEOs driving the transition from traditional on-premise IT solutions to off-premise cloud-based solutions is making sure they have a good handle on how the cloud dramatically changes the balance sheet, said Thoreson. "As the firm shifts from an on-premise to a cloud model, there is an 18-month window to get over before you start to see recurring revenue cash flow come in," he said.

Thoreson said the cloud applications that a solution provider chooses to sell will have a significant impact on the cloud transition. "The vendors have different royalty models, license fee models and objectives," he said. "What we have found from a strategy perspective is you have to gain a bigger wallet share of your customer. So while your average costs go down, your margins go down and you have to have more applications to sell," he said. "So the CEO and the management team and the salespeople have to be incented not only to add net new customers, but to grow the existing wallet share or sales ratio for every customer. From a compensation perspective, you have to pay that salesperson enough to get him or her excited to want to add new customers."

Ultimately, said Thoreson, CEOs need to understand the dramatic change required to be successful in the cloud and be willing to live with lower compensation in the short term in order to build a more stable and healthy cloud business model with robust recurring revenue. That could be a difficult pill to swallow for CEOs used to big paychecks.

PUBLISHED SEPT. 10, 2012

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