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Private Equity Insights

How to Structure Executive Compensation in PE-Backed Construction Companies

Base, bonus, equity and rollover: how private equity backed construction companies structure executive pay to attract strong operators and keep them through exit.

Shawn DesgrosellierOct 19, 20267-minute read
Key takeaways
  1. The package has four parts: a competitive base, a bonus tied to measurable results, equity that pays at exit, and retention terms.
  2. Equity is what separates these roles from jobs at large private or public contractors, and it usually decides the candidates sponsors most want.
  3. Equity only counts if candidates can see the math. Show them what it is worth below, at and above plan.

Executive compensation in a PE backed construction company has four parts: a competitive base salary, an annual bonus tied to measurable results, a meaningful equity stake that pays at exit, and retention terms that protect the sponsor's investment.

The equity component is what separates these roles from leadership positions at large private or public contractors, and it is usually the deciding factor for the candidates sponsors most want.

Illustrative
Figure 1. The package, built like a project
RETENTION TERMS EQUITY pays at exit ANNUAL BONUS BASE SALARY Retention terms: what holds it together Vesting, leaver terms, covenants, change of control Equity: what moves the candidate Pays at exit. Usually the deciding factor Annual bonus: what focuses each year Pays yearly on a short, measurable scorecard Base salary: what makes the move possible Competitive with established firms of similar size

01 · The candidate poolWhy Compensation Design Matters More in Construction

Strong construction executives are rarely unemployed and rarely underpaid. Top operators at established general contractors and specialty contractors often have stable roles, solid bonuses, and in some cases ownership through ESOPs or partner programs.

Hypothetical
Figure 2. Where a Texas platform's next COO is today, and what each would give up
Loading map…
PE-backed platform hiring a COOCandidate in a stable role todayThe move the offer has to justify
A made-up candidate slate. Each finalist already has something valuable that a base and bonus alone will not replace.

To move them, a PE backed company must offer something those firms cannot: the chance to build value and share in it on a defined timeline.

At the same time, many construction executives have never held private equity style equity. If the plan is not explained clearly, candidates will discount it to zero and compare only base and bonus.

02 · Base, bonus, equity, rolloverThe Four Components

01Base salary

Base should be competitive with established firms of similar revenue and complexity. Sponsors sometimes try to offset a below market base with equity. That works for some candidates, but many experienced operators have family and financial obligations that make a significant base reduction difficult.

Illustrative
Figure 3. Set base from the market, not from the past
MARKET RANGE · similar revenue and complexity What the founder paid themselves What the prior leader earned Candidate's current base The offer Lower base Higher base Anchoring to the founder or prior leader starts the conversation below what a strong operator already earns.

02Annual bonus

Tie the bonus to a small number of measurable targets the executive controls: EBITDA, gross margin, backlog, safety performance, working capital or project fade. Avoid bonuses that depend on discretion alone. Construction leaders are used to clear scorecards.

Hypothetical
Figure 4. Six measures, all controllable, none discretionary
100% measurable EBITDA Gross margin Backlog Safety performance Working capital Project fade 35%20%15%10%10%10% Division EBITDA in the planMargin on completed workSigned backlog at year endRecordable rate at goalBillings and collectionsNo major job fades "Overall contribution" 0% Discretion alone. Avoid
Weights and targets are made up for illustration. Pick measures the executive can move, and keep the list short.

03Equity

Most sponsors create a management incentive pool, commonly a single digit to mid teens percentage of fully diluted equity depending on deal size and structure. Awards to individual executives are typically split between time based vesting and performance based vesting tied to sponsor returns.

Illustrative
Figure 5. How big the pool is, and how one award vests
MANAGEMENT POOL · % OF FULLY DILUTED EQUITY Commonly single digit to mid teens Depends on deal size and structure 0%5%10%15%20% 2% award (Figure 6) ONE EXECUTIVE'S AWARD Time based Performance based Vests with continued service over the hold Vests at exit if sponsor return targets are met
The scale and the even split are illustrative. Splits vary by sponsor and plan.
What matters most to candidates

What is this worth to me if we hit the plan?

04Rollover and co investment

Founders and existing leaders often roll a portion of their proceeds into the new entity. Incoming executives may be invited to co invest. Both align interests, but neither should be required as a condition of employment without careful thought, because it can exclude strong candidates who lack liquid capital.

Invite

Co investment as an option

Aligns interests for candidates who want more upside and have the capital to commit.

Keeps the slate wide
Require

Co investment as a condition

Excludes strong operators who lack liquid capital, often the ones the plan needs most.

Narrows the slate

03 · Show the mathExplaining Equity to Candidates

Give finalists a simple illustration of what the award is worth below plan, at plan and above plan. A one page summary like the one below works well. Replace the made-up numbers with real numbers from your model.

Hypothetical
Figure 6. The one page a finalist should see before the offer
Equity illustration · CFO finalist2% award · hypothetical
Entry: $200M enterprise value8x on $25M EBITDA$100M debt, $100M equityBase: $400K
Below plan
EBITDA at exit
$28M
Exit multiple
7.0x
Enterprise value
$196M
Net debt
$90M
Equity value
$106M
Value created
$6M
Your 2% award$120K0.3× annual base
Plan achieved
EBITDA at exit
$40M
Exit multiple
9.0x
Enterprise value
$360M
Net debt
$70M
Equity value
$290M
Value created
$190M
Your 2% award$3.8M9.5× annual base
Above plan
EBITDA at exit
$50M
Exit multiple
10.0x
Enterprise value
$500M
Net debt
$60M
Equity value
$440M
Value created
$340M
Your 2% award$6.8M17× annual base
Made-up numbers. The award is 2% of equity value created above the entry value, before taxes and vesting conditions.

Candidates who can see the math take equity seriously. Candidates who see only a percentage tend to ignore it.

Tower crane over an active project, the kind of growth an equity plan is built on

04 · Protecting the investmentRetention and Protection Terms

  • Vesting schedules that reward staying through exit
  • Good leaver and bad leaver provisions that define what happens to equity if the executive departs
  • Non compete and non solicitation agreements appropriate to the role and enforceable where the company operates
  • Change of control provisions that clarify treatment at sale
Illustrative
Figure 7. When each term matters, and when to raise it
Term
At the offer
During the hold
If they leave
At sale
Vesting schedule
Explain
Applies
Applies
Applies
Good and bad leaver
Explain
Applies
Non compete and non solicit
Explain
Applies
Change of control
Explain
Applies
Raise early, in plain languageWhen the term takes effect

Be transparent about these terms early. Surprises in the final document are a common reason late stage candidates walk away.

05 · What to avoidCommon Mistakes

Common mistakes

  • Anchoring base salary to what the founder paid themselves or the prior leader
  • Presenting equity without any illustration of potential value
  • Setting bonus targets the executive cannot influence
  • Requiring co investment from every hire
  • Waiting until the offer stage to discuss restrictive covenants

Instead

  • Set base from established firms of similar revenue and complexity
  • Show the award below, at and above plan with real numbers
  • Use a short scorecard of measures the executive controls
  • Invite co investment rather than require it
  • Share covenant terms in the first serious conversation

06 · ClosingWhat This Means for Your Firm

2jobs
The right package

Attracts operators who would not otherwise leave a stable role, and keeps them focused on the same outcome the sponsor wants.

Getting the structure right before the search begins makes recruiting faster and offers more likely to close.

Vitality Group advises sponsors and portfolio companies on market compensation for construction and real estate leadership roles as part of every search. If you are building a package for a portfolio company leader, we are glad to talk it through.

Notes
  • Figures 2, 4 and 6 use made-up examples to show format only. They are not market data.

About the author
Shawn Desgrosellier is Founder, President and CEO of Vitality Group, an executive search firm specializing in construction and real estate, and founder of Vitality Talent Acquisition, which helps employers improve talent acquisition performance.

FAQCommon Questions

How is executive pay structured in a PE backed construction company?

In four parts: a competitive base salary, an annual bonus tied to measurable results, a meaningful equity stake that pays at exit, and retention terms that protect the sponsor's investment.

How big is a management incentive pool in private equity?

Commonly a single digit to mid teens percentage of fully diluted equity, depending on deal size and structure. Individual awards are typically split between time based vesting and performance based vesting tied to sponsor returns.

What should a construction executive's bonus be tied to?

A small number of measurable targets the executive controls, such as EBITDA, gross margin, backlog, safety performance, working capital or project fade. Avoid bonuses that depend on discretion alone.

How should sponsors explain equity to executive candidates?

Show finalists what the award is worth below plan, at plan and above plan, using real numbers from the investment model. Candidates who can see the math take equity seriously. Candidates who see only a percentage tend to ignore it.

Should incoming executives be required to co invest?

Not without careful thought. Co investment aligns interests, but requiring it as a condition of employment can exclude strong candidates who lack liquid capital.

Building a package for a portfolio leader?

Get the structure right before the search begins.

We advise sponsors and portfolio companies on market compensation for construction and real estate leadership roles as part of every search.

Talk to Vitality Group