Turning governance into growth for Private Equity-backed organisations
In private equity-backed businesses, a Remuneration Committee (“RemCom”) is not a governance checkbox; it can be a strategic lever. For organisations under this ownership structure, the RemCom can be the engine that aligns organisational design, reward systems, and performance culture directly with the value-creation plan. It can move beyond compliance-driven models to become a catalyst for clarity, pace, and exceptional returns.
Core principles for value-driven remuneration
An effective RemCom in a private equity environment should operate on core principles that directly support the investment thesis. These principles should ensure that every pound of reward is engineered to drive a return, with the goal to create a powerful link between individual performance and investor outcomes.
Execution alignment
Compensation should not solely be about rewarding success; it should be about incentivising the specific actions and behaviours that drive the value-creation plan. This can mean tying incentives directly to key PE levers such as EBITDA growth, cash flow generation, operational efficiency, and strategic talent retention. The goal of the RemCom will be to reinforce evolving roles, decision rights, and accountability in line with the investment thesis.
The case study examples referenced throughout this publication, are reminiscent of typical scenarios across the private equity sector, where RemCom’s have been beneficial.
Real-world application: In one growth company, three co-founders reached an impasse with their board over compensation structure. The board wanted to award more equity options while the founding team pushed for higher base salaries. The co-founder RemCom member recognised that circumstances had evolved – university friends had become husbands and fathers with mortgages and school fees. By understanding these changed motivations, they developed a long-term incentive plan that balanced immediate cash needs with equity upside, ultimately delivering a successful trade sale that satisfied all stakeholders.
Performance culture
The RemCom can be instrumental in building a culture where performance is the primary language. By rewarding the right behaviours, the committee can reinforce a cycle of collaboration, discipline, and relentless delivery. What gets rewarded gets repeated, ensuring that the organisation’s culture becomes a performance fuel that drives sustainable value creation.
Measuring what matters
In a growth environment, it is critical to measure appropriately. The RemCom aims to ensure that performance metrics are not just financial but also aims to encompass the operational and strategic milestones that are critical to long-term value creation. This includes setting clear performance gates, vesting schedules, and clawback provisions to protect investor interests, while incentivising both behaviours and outcomes.
The case study examples referenced throughout this publication, are reminiscent of typical scenarios across the private equity sector, where RemCom’s have been beneficial.
Case study: A top-performing COO in a PE-backed company was identified as a flight risk, despite being offered significant increases in equity awards. The executive seemed ambivalent to the generous offer, insisting he didn’t want to leave but displaying clear discomfort. Through patient dialogue, the RemCom discovered the real issue wasn’t compensation level but cash flow – the executive’s spouse had recently lost their job and mortgage payments were becoming a burden. The committee redesigned the incentive package to include immediate benefits such as a company car and quarterly bonuses, successfully retaining this key talent through to the trade sale three years later.
Designing for agility and impact
The goal of a RemCom in a PE-backed company is typically designed for agility and impact. This is typically reflected in its structure, its focus and its direct engagement with the business.
A lean and focused structure
PE-backed boards are typically smaller and more focused than their public counterparts. This typically allows for more nimble decision-making and deeper engagement from each member. RemCom members are usually selected for their operational expertise and direct experience with value creation, not for prestige or representation.
Deep engagement beyond the boardroom
Directors on PE-backed boards typically spend significantly more time with key stakeholders, including management, customers, and employees. This hands-on approach usually allows the RemCom to gain a granular understanding of the business and to design compensation structures that are fit for purpose.
Strategic succession planning through the RemCom
Beyond current compensation design, effective Romcoms’ typically play a crucial role in strategic succession planning and leadership development. This forward-thinking approach can protect value creation by ensuring leadership continuity and development.
The case study examples referenced throughout this publication, are reminiscent of typical scenarios across the private equity sector, where RemCom’s have been beneficial.
Succession success story: A RemCom member working with a founder-led business made it a practice to ask founders about their long-term aspirations. In one case, the founder expressed interest in eventually becoming a Chairman rather than remaining as CEO. Rather than waiting for this transition to become urgent, the RemCom member proactively connected the founder with an experienced Chair for mentoring. Over the following years, they systematically evaluated the leadership potential of key team members, understanding what motivated each individual beyond compensation and their respective long-term career aspirations. The result was a carefully orchestrated transition where the founder moved to Executive Chairman, the COO stepped up to CEO, and the broader leadership evolution was achieved without any unwanted departures. The experienced Chair continues to mentor the original founder, ensuring ongoing value creation through this transition.
Transforming compensation to drive quality of earnings
Sophisticated applications of RemCom strategic thinking typically involve shifting compensation structures from simple revenue metrics to quality of earnings measures. This transformation can be particularly powerful in subscription-based or recurring revenue businesses, where the quality of revenue usually matters as much as the quantity.
The case study examples referenced throughout this publication, are reminiscent of typical scenarios across the private equity sector, where RemCom’s have been beneficial.
Quality of earnings transformation: A PE-backed software company was experiencing rapid 40% year-over-year revenue growth but concerning unit economics. The sales team was incentivised purely on revenue bookings, leading to behaviours that undermined long-term value creation: heavy discounting to hit targets, prioritising short-term contracts for faster commissions, pursuing high-churn customer segments, and bundling low-margin professional services to inflate deal sizes.
The RemCom initiated a comprehensive review, working with PE sponsors to redesign the compensation structure around quality of earnings principles. The new structure allocated 60% of variable compensation to Annual Recurring Revenue from contracts with >90% gross margins, 25% to customer retention metrics measured 12 months post-sale, and 15% to expansion revenue from existing accounts. Quality gates included commission clawbacks for customers churning within 12 months and bonus multipliers for deals achieving target customer success scores.
The transformation was implemented in a phased approach over seven months, with careful change management and communication. The results were as follows: customer lifetime value increased by 65%, gross margins improved from 72% to 84%, annual customer churn decreased from 18% to 8%, sales team retention improved by 40%, and company valuation increased by 2.1x at exit, with the acquirer specifically citing the quality of recurring revenue as a key value driver.
Practical steps for an effective RemCom
For a private equity-backed organisation, establishing an effective RemCom from the outset can be critical. The following steps provide a practical guide to creating a committee that can be a strategic partner in value creation.
Select committee members with relevant experience
It is advisable to choose committee members with prior RemCom experience in a growth or PE-backed business. Their understanding of the unique challenges and opportunities of this ownership structure can be valuable. Looking for directors who have navigated similar value creation journeys and understand the pace required in this environment can also assist.
Build clarity of remit and align terms of reference
The RemCom’s terms of reference should typically be aligned with the value-creation plan and reviewed annually. This will ensure that the committee’s work remains directly relevant to the investment thesis. Clear documentation of roles, responsibilities, and decision-making authority helps to prevents confusion and can enable swift action.
Engage PE sponsors and executives early
Engage PE sponsors and the executive team early in the design process can help to ensure alignment on expectations and incentive structures. This collaborative approach from the outset can prevent misalignment and typically ensures that all stakeholders understand how compensation will support the broader value-creation strategy.
Use independent, sector-relevant benchmarking
Leveraging independent, sector-relevant benchmarking and remuneration consultants can help ensure that compensation is competitive and appropriate. This external perspective can provide credibility and ensure that reward levels are calibrated correctly for the market and the specific challenges of the business.
Incentivise behaviours as well as outcomes
It is advisable to design incentive plans that reward not only the achievement of financial targets but also the behaviours that drive sustainable growth. Including performance gates, vesting provisions, and clawback mechanisms can ensure rewards are earned through sustained performance rather than short-term gains.
Design plans with agility
Building flexibility into compensation plans can allow for adjustments as the company’s strategy evolves. In a dynamic business environment, the ability to adapt incentive structures quickly can sometimes be the difference between success and failure. This agility can ensure that compensation remains aligned with changing priorities.
Promote transparency and accountability
Documenting the rationale behind all compensation decisions and maintaining a clear line of independence to ensure accountability is advisable. This transparency can typically build trust with stakeholders and can provide a clear audit trail for decision-making. Independence can ensure that decisions are made in the best interests of value creation rather than personal relationships.
Conduct reviews after each cycle
It is advisable to conduct a thorough review after each performance cycle, benchmark externally, and refine the process for continuous improvement. This iterative approach can ensure that the RemCom’s effectiveness improves over time and that “lessons learned” are incorporated into future cycles.
Understanding individual motivation: the key to effective incentives
An effective RemCom can be said to typically hinge on the ability to understand what truly motivates individuals beyond simple financial metrics. People’s motivations usually evolve with their life circumstances, career stage, and personal priorities. A RemCom that can recognise and adapt to these changing motivations can design far more effective incentive structures.
The case studies throughout this publication seek to illustrate this principle in action: university friends becoming responsible for families with different financial priorities, high performers facing personal financial pressure despite generous equity offers, founders evolving their career aspirations over time, and sales teams needing incentives aligned with long-term value creation rather than short-term revenue targets. In each case, the RemCom’s ability to listen, understand, and adapt can make the difference between success and failure in talent retention, motivation, and ultimately value creation.
Beyond compliance: The RemCom as a strategic catalyst
In the context of private equity ownership, the Remuneration Committee can be seen to be far more than a governance function. It can be a strategic differentiator that has the ability to provide a significant competitive advantage. By focusing on execution alignment, building a high-performance culture, and measuring appropriately, the RemCom can become an engine for value creation.
Ideally, every pound of reward should drive return. This principle can guide effective RemComs’ in creating compensation structures that are not just fair and competitive but also strategically aligned with the value-creation plan. The result can be an organisation where individual success and investor returns are inextricably linked, driving the pace, clarity, and returns that characterise successful private equity investment.
The RemCom can be the catalyst that transforms governance from a compliance exercise into a growth engine, ensuring that clarity and pace become competitive advantages rather than operational challenges. Through deep understanding of individual motivations, strategic succession planning, sophisticated quality of earnings approaches, and agile compensation design, the RemCom can become a vital tool for value creation in the private equity environment.
Graham Butler
Head of Talent, Gresham House Ventures
