By François Piché-Roy, President and Managing Partner of PIXCELL – Leaders recruiting leaders, an executive search firm specialized in the private-capital market

For most of private equity’s modern history, executive compensation answered a single question: how do we keep this leadership team in place until we sell? Pay was built around a clean three to five year arc, with the bulk of the reward waiting at the finish line. That model assumed a predictable exit. Today, that assumption no longer holds.

Hold periods have stretched, capital markets have become more volatile, and sponsors are asking far more of the executives running their portfolio companies. As a result, the purpose of compensation has also changed to adapt. It is no longer a retention contract. It has become an engine for value creation, engineered to reward the specific behaviours that build a more valuable business: EBITDA quality, working capital discipline, pricing power, clean M&A integration, digital transformation, and exit readiness..

“The best private equity firms stopped asking, ‘What will make this executive stay?’ a long time ago,” says François Piché-Roy, president and managing partner of PIXCELL. “The real question now is, ‘What should the incentive be for this person to create value in the organization for the next five, six, seven, or sometimes ten years?’ Once you frame compensation that way, everything changes. You stop paying for presence, and you start paying for specific outcomes.”

Why Longer Hold Periods Are Reshaping Private Equity Executive Compensation

The single biggest force reshaping executive pay in private equity is time. According to Bain & Company, holding periods at exit now hover near seven years, up from an average of five to six years through most of the 2010s. In Pitchbook’s Q2 2025 report, it estimated that U.S. PE firms were holding enough company inventory to represent roughly a seven to eight year supply at the current pace of exits, while Bain estimates the industry is sitting on roughly 32,000 unsold companies worth about $3.8 trillion. By the same analysis, nearly 40% of buyout-backed companies have now been held for more than five years, compared to 29% in 2019.

These longer holds break the original logic of most incentive plans. An equity package designed around a five year exit doesn’t make sense when the actual horizon drifts to seven or eight years. Executives who signed up for one timeline can find themselves running a different race. Compensation built for a quick flip simply does not survive a long hold, and sponsors have learned this the hard way.

How Executive Compensation Drives Value Creation in Private Equity

The shift in thinking is fundamental. Retention keeps a seat filled, while value creation determines whether the return on investment is delivered. It’s no secret that leadership is where much of that value lives. In one McKinsey survey, 94% of general partners said portfolio company leadership contributed, on average, to 53% of the value created in their investments. The same research found that CEOs who get talent decisions right in their first year deliver 2.5 times the return on the initial investment.

That is why modern plans are engineered around behaviours rather than tenure. Bonuses should be less generic and more tightly linked to the metrics that actually move enterprise value: revenue quality, cash conversion, pricing, churn, margin expansion, integration milestones, and exit readiness. The message to the management team is direct: We are not paying you to be here. We are paying you to build something measurably more valuable. This may not attract all leaders, but it will attract those who are confident in their ability to do so.

“When we negotiate compensation with CEO candidates who have experience within private equity firms, the great ones are already thinking about how equity should be structured for both themselves and their executive teams based on the investment thesis,” adds Piché-Roy. “Base compensation, although still important, becomes secondary to equity.”

How Private Equity Firms Are Redesigning Long-Term Incentive Plans (LTIPs)

If the goal has changed, the instruments have to change with it. Long-term incentive plans, once built around a single exit event, are being rebuilt for a longer and less certain road.

Multi-Tranche Vesting and Interim Liquidity

Rather than parking all the upside at exit, sponsors increasingly split awards into tranches: some vesting on time, some on performance, and some on transaction. Many also create interim liquidity, with partial payouts at a refinancing, a dividend recapitalization, a continuation vehicle transfer, or the achievement of a major value milestone. The logic is human. A six or seven year wait can make equity feel abstract, and a well-timed partial crystallization keeps the reward tangible.

Refresh Grants and Re-Underwriting

When an original plan falls underwater because of higher rates, softer multiples, or a delayed exit, firms are turning to refresh pools and revised hurdles to keep management engaged. Re-underwriting a plan mid-hold is no longer treated as a sign of failure. It is a recognition that a stale incentive is a dangerous one.

Phantom and Synthetic Equity

Where real equity is administratively complex or undesirable, private companies are leaning on phantom equity, stock appreciation rights, and performance units to mimic ownership economics without diluting the cap table or handing over voting control. Deloitte’s 2025 Private Company Executive Compensation Survey, drawn from 500 U.S. enterprise-sized companies, points to incentive plans becoming standard practice and increasingly blending financial targets with non-financial measures such as customer satisfaction. The toolkit is proliferating because one size no longer fits all.

Creative Structures Gaining Ground

Beyond the standard toolkit, sponsors are experimenting with structures designed to sharpen the link between outcome and reward. Exit-value sharing pools hand management a percentage of the value created above entry value or above a defined hurdle. Milestone-based refreshes unlock fresh grants only after a specific achievement, such as an acquisition integration, an ERP implementation, or measurable margin expansion. And when an asset rolls into a continuation vehicle, management is increasingly offered partial liquidity alongside an entirely new incentive plan. The common thread is precision: each structure pays for a defined result rather than the simple passage of time.

CEO Compensation in Private Equity: Founder-Owner vs. External CEO

Not every executive needs the same package, and one of the sharpest distinctions sits right at the top.

The Founder Using PE as a Liquidity Event

A founder selling into a sponsor has usually already created value and is often de-risking personal wealth. The central tool here is rollover equity: the founder sells part of the stake but reinvests a meaningful portion alongside the new owner, signaling confidence and staying economically committed to the next chapter. The psychology of this matters as much as the math. A founder is not just being paid; they are being asked to believe in chapter two of a company they built. A thoughtful package has to address control, legacy, autonomy, governance, and the very real risk of becoming an employee in their own creation.

The Externally Recruited CEO

Although they will participate in elaborating the value creation plan, an external CEO is ultimately buying into someone else’s creation and carrying genuine career risk. The package has to offset that risk with competitive cash, a sign-on or make-whole component, and, above all, a meaningful equity grant. The numbers reflect the stakes: according to Carta, the median newly hired CEO at a PE-backed corporation receives an initial grant of about 2.6% of fully diluted equity, six to seven times the roughly 0.4% granted to other C-suite hires. For these leaders, the package has to answer one question above all others: if I execute the sponsor’s plan, do I share meaningfully in the value I create? That’s where real incentive is created.

Extending Equity Compensation Beyond the CEO and CFO

Value is not created by the CEO and CFO alone, and pay follows the work. Equity should be extended to the broader leadership group driving the thesis, recognizing the “sweat equity” of the COO, CHRO, CRO, CTO, and the operating and integration leaders who do the unglamorous work of building a better company. The same Carta report shows that the share of PE-backed companies extending equity below the senior executive tier climbed from 25% in 2021 to 36% in 2023. Aligning the full value-creation team, not just the top two seats, is becoming a hallmark of the most successful private equity companies.

Non-Monetary Executive Retention Strategies in Private Equity

The strongest non-monetary retention tools are also the ones executives talk about most: real strategic influence, a credible and supportive board relationship, the trust and autonomy to build their own team, access to seasoned operating-partners, the opportunity to grow within other portfolio companies, a clear value-creation roadmap, and the reputational capital that comes from delivering a successful exit. For founders, the list expands to include legacy protection, role clarity, a board seat, and the preservation of the culture they spent years building. Money may bring an executive to the table. These factors are often what keep them there.

“When we place an executive into a private equity-backed business, the compensation conversation is really about alignment,” says Piché-Roy. “The candidates who say yes are the ones who can see exactly how they participate in the value they help create. If they cannot see it, companies risk losing the talent their thesis depends on.”

Designing a Private Equity Compensation Plan That Creates Value

The firms pulling ahead in today’s market have stopped treating compensation as a check-in-the-box expense and started treating it as a strategic instrument. They design plans that reward the specific behaviours their value-creation plan requires, that flex for longer holds, and that align founders, external hires, and the wider leadership team around a single shared outcome. In a market defined by patience, that alignment makes all the difference.

Getting it right takes more than a template. It takes a clear view of the talent market, a deep understanding of what motivates leaders at this level, and the judgment to match the right executive to the right incentive structure. That is exactly where the right executive search and leadership advisory partner earns its keep. If your firm is rethinking how to attract, motivate, and retain the leaders who will drive your next exit, reach out to PIXCELL to start the conversation.