KEY POINTS:
The chief executives of private equity-owned companies tend to earn the same sort of salaries as their counterparts in listed companies, but can make several million dollars through their shareholdings in the businesses they manage.
Without even the modest disclosure requirements of listed companies, private equity chief executives' pay generally remains secret.
But one private equity fund employee says the rewards can be substantial.
"We tend to pay good market prices for CEOs without being disproportionately large, but the return, as you'd expect, is on the equity side," he says.
The top executives in private equity-owned companies typically take an equity stake in the companies they manage. Structures differ between firms.
"Our philosophy is to pay people cash compensation in line with what they might expect in the marketplace and then to incentivise people to join us by providing the equity upside," says a member of an Australian private equity firm.
Unlike the packages that chief executives in listed companies earn, there is no annual bonus for private equity executives.
"In terms of the way private equity structures it, there's no performance element in the salary, so the salary is just a base number," the private equity representative says.
"And everyone who's in the deal gets incentivised solely by the return on their equity over and above their base salary."
Such a structure also ensures that managers remain with the company for the term of the investment, because they cannot cash in their equity until the investment is realised.
When the private equity investment is sold, the rewards can run into the tens of millions of dollars for the management team.
The senior managers and directors of Australian and New Zealand car parts business Repco Corp owned a 17 per cent stake when the company was floated in 2003 - about A$75 million worth of the A$442 million float.
Given that Repco was only taken private in 2001, that represents a pretty good return for the small group of people who shared in the spoils.
While pay structures differ from firm to firm, one of the key principles is that managers invest their own money in the business. Often they are helped to make the acquisitions by the private equity owners.
"People generally have to invest their own money, but it's on a preferred basis which gives them a leveraged exposure to the returns," said the Australian private equity player.
"Most schemes will involve the managers investing a reasonable sum of money - it's enough to let them go to sleep at night but make them get up in the morning.
"We'd expect people to make upwards of 10 times what they invest. If someone invested, two-, three-, four-hundred thousand, then they'd get 10, 15, 20 times the money back on that number."
While this may seem the path to riches, there is a downside - less job security.
"We'll shift out a CEO quite quickly if they're not performing and their contracts are such that they don't tend to be costly shifts," said one.
"We don't enter into long-term contracts which require them to be paid out significant money to release them."
However, the fact that private equity managers own an equity stake can complicate their departure.
