A private equity (PE) buyout transaction typically involves a PE fund, or PE sponsor, acquiring a portfolio company to grow the value of the portfolio company's business and realize a return on its investment within about three to seven years. PE sponsors oversee their portfolio companies through board membership and voting control, but they leave the day-to-day business operation to the portfolio company's management team. The management team is therefore essential to the success of the PE sponsor's investment.

Because the management team can make or break the PE sponsor's investment, PE sponsors must carefully design their compensation programs to:

To achieve the desired objectives, PE sponsors typically design management compensation programs that rely less on cash compensation and more on equity-based compensation. PE sponsors also generally expect key members of management to hold significant equity positions in the portfolio company, often through a cash investment or equity rollover investment at the time of the transaction. PE sponsors sometimes design management equity programs so that the management team, like the PE sponsor, only realizes a return on its equity investment at the time of the PE sponsor's exit (for example, through an initial public offering (IPO) or a sale of the company).

Although equity compensation plays an outsized role in portfolio company management compensation, management teams are often also covered by employment agreements and the PE sponsor typically implements:

The Private Equity Portfolio Company Management Compensation Toolkit contains continuously maintained resources designed to help PE sponsors design management compensation programs that meet the PE sponsor's business objectives.