Introduction: Equity Is the New Executive Currency
In the world of private equity, top-tier executive talent isn’t lured by base salary alone. Today’s transformational leaders want a true stake in the upside—and negotiating carry, co-investment, and other equity incentives for PortCo executives has become a cornerstone of executive hiring strategy.
For PE sponsors and portfolio companies alike, structuring competitive yet aligned incentive packages is both an art and a science. It’s not just about numbers—it’s about long-term value creation, retention, and trust.
At JRG Partners, we regularly guide sponsors and executives through high-stakes private equity portfolio company executive carry negotiations. Here’s what we’ve learned.
1. The Role of Carry in Executive Compensation
Carry (carried interest) is a powerful tool used to align executive interests with those of the fund. It refers to the share of profits (typically after a hurdle return) that executives may receive from the value they help create during the hold period.
In private equity portfolio company executive carry negotiation, consider the following:
- Eligibility & Vesting: Not all execs qualify for fund-level carry—determine who receives it and over what vesting period (usually 3–5 years).
- Performance Gates: Ensure the carry is tied to meaningful outcomes—EBITDA growth, IRR, MOIC, or strategic milestones.
- Tiered Pools: Differentiate equity awards across CEO, CFO, and C-suite levels with appropriate carry percentages.
- Repurchase Terms: Be clear on what happens to carry if the executive departs early (voluntarily or otherwise).
A well-negotiated carry package aligns incentives and retains talent during turbulent or long hold periods.
2. Co-Investment Opportunities for PE-Backed Executives
Co-investment opportunities allow executives to invest personal capital into the portfolio company alongside the PE firm, reinforcing commitment and alignment.
Key considerations in co-investment opportunities for PE-backed executives:
- Voluntary or Required: Determine whether executives are invited to co-invest or required to put in capital. Many PE firms expect a minimum contribution.
- Financing Support: Some sponsors offer financing assistance (e.g., loans, deferred payments) to reduce cash barriers.
- Returns Parity: Ensure co-investors receive the same return mechanics as the PE firm (or clearly defined variations).
- Cap Table Clarity: Executives should understand their position relative to common equity, preferred shares, and other instruments.
Co-investments deepen buy-in—executives perform differently when their own money is at stake.
3. Structuring Equity Incentive Packages for PE Leaders
Beyond carry and co-invest, comprehensive equity incentive packages can include stock options, restricted stock units (RSUs), performance shares, and phantom equity.
When structuring equity incentive packages for PE leaders, ask:
- Is the structure tax-efficient? Consider ordinary income vs. capital gains implications.
- What’s the dilution impact? Balance incentive with shareholder protection.
- How is value communicated? Many executives undervalue equity due to complexity—clarity is critical.
- What’s the timing of liquidity? Executives should know when and how value can be realized (e.g., exit-only, drag-along clauses).
Transparency and simplicity go a long way in reinforcing the value of the package.
4. Executive Equity Participation in Private Equity Deals
High-performing leaders want more than compensation—they want participation. Whether through carry, co-investment, or synthetic equity, executive equity participation in private equity deals is a strategic lever for attracting A-players.
Best practices include:
- Early Discussions: Surface equity terms early in the recruiting process to avoid misunderstandings or dropouts at the offer stage.
- Exit Modeling: Provide clear examples of how the equity might perform in various exit scenarios (e.g., 2x, 3x, 5x MOIC).
- Simplicity Matters: Complex spreadsheets don’t close executives—crisp narratives and visuals do.
- Benchmarking: Tailor packages based on role, industry, and deal size. JRG Partners maintains real-time benchmarking data for executive compensation in PE.
Equity is no longer a bonus—it’s expected. Candidates weigh these incentives against not just salary, but long-term career impact.
5. Negotiating Phantom Equity for Portfolio Company Management
Not all companies offer true equity. In some cases—particularly where the capital structure is complex or equity dilution is a concern—phantom equity is used to simulate the benefits of ownership without changing the cap table.
In negotiating phantom equity for portfolio company management, consider:
- Trigger Events: When does phantom equity pay out? Usually on a sale, recap, or IPO.
- Valuation Mechanism: How is the value calculated? Based on enterprise value or a defined formula.
- Tax Treatment: Phantom equity is often taxed as ordinary income—executives should understand this upfront.
- Retention Hooks: Include time-based and performance-based vesting to incentivize long-term commitment.
Phantom equity can be a strong alternative when structured clearly and fairly.
Conclusion: Equity Isn’t Just a Number—It’s a Narrative
Equity incentives are more than compensation—they’re a story about shared risk, shared reward, and transformational impact. Whether you’re offering carry, co-investment, or phantom equity, success lies in negotiation, clarity, and alignment. Ultimately, your investment thesis is only as good as the team executing it, making value creation plan talent acquisition the most critical lever for success. At JRG Partners, we specialize in:
- Private equity portfolio company executive carry negotiation
- Co-investment opportunities for PE-backed executives
- Structuring equity incentive packages for PE leaders
- Executive equity participation in private equity deals
- Negotiating phantom equity for portfolio company management
We help private equity sponsors and C-level executives align on equity from day one—because that alignment is what drives value creation, retention, and ultimately, successful exits. Need help structuring an equity package that closes and retains your next PortCo leader? Let’s talk.
