GE is not alone. This occurs across most public companies. Part of the delta between what private equity companies return ~17% and public companies ~10-11%.
If my understanding is correct, the implicit assumption here is that PE firms have better compensation structures and that explains their superior returns?
Since I know very little about PEs, could you expand on this?
It is one aspect of it. PE does a better job of cost controls in general (they don’t have a backup 747 following the CEO around). I would say that their compensation structures do a better job of aligning incentives as they typically are focused on a liquidity event (prepping the company for sale, etc.) - so a larger percentage of compensation is tied to this result. As the article points out, public companies are more focused on lining the pockets of the executive class - the Board of Directors is complicit. They have tried in the past to blame compensation consultants but it’s the BOD at the end of the day.
Bravo, Roger!
GE is not alone. This occurs across most public companies. Part of the delta between what private equity companies return ~17% and public companies ~10-11%.
If my understanding is correct, the implicit assumption here is that PE firms have better compensation structures and that explains their superior returns?
Since I know very little about PEs, could you expand on this?
It is one aspect of it. PE does a better job of cost controls in general (they don’t have a backup 747 following the CEO around). I would say that their compensation structures do a better job of aligning incentives as they typically are focused on a liquidity event (prepping the company for sale, etc.) - so a larger percentage of compensation is tied to this result. As the article points out, public companies are more focused on lining the pockets of the executive class - the Board of Directors is complicit. They have tried in the past to blame compensation consultants but it’s the BOD at the end of the day.
Spot on!
Brilliant analysis.