The transition from pre-IPO to a
publicly traded company is significant in many areas, including executive compensation
levels and practices. Connell & Partners conducted a study (click here to download the full report) comprised
of 46 companies in the High Tech, Biotech, and Alternative Energy
industries that went public in the year 2011 and have
since released proxy data for that year (generally the following year).
We examined the compensation levels and practices in the year prior to their
IPO, and in the year of their IPO to assess the changes. We examined the
CEO, CFO and Head of Sales Positions as these were the three most prevalent
positions listed in the companies’ public filings. Some of the major
areas of change include:
Cash Compensation – Cash compensation levels increase
for all executives, particularly for the CEO and CFO. Key Learning
– Your labor market will likely have evolved as you migrate to a public
company, competing not only against direct product competitors but those that
are now competing for financial capital. Ensuring that you have appropriately
determined your labor market for talent so that critical players are
compensated competitively can help ensure they stay and remain appropriately
incented to deliver.
Increase Amounts – Compensation increase amounts are
generally in the double digits for key executives such as the CEO, CFO and Head
of Sales. Key Learning – Understanding your labor market,
and the additional responsibilities required of running a public company, along
with the associated new expectations, as you shift from private to public often
comes with a price.
Bonus Targets and Plans – Bonus targets increase and bonus
plans shift from primarily discretionary to more formulaic and goal based. Key
Learning – Continued and sustained growth of strategic metrics (e.g.,
revenue / profit growth) become expected by Wall Street, and therefore, bonus
plans become more formulaic, rather than discretionary, milestone-based plans.
Share Usage and Dilution – Equity dilution and the annual
stock “burn rate” increases as the IPO approaches. Key Learning –
Share usage and dilution continue to be critical measures that shareholders are
interested in managing. Ensuring you have sufficient equity pools can help
provide meaningful rewards for employee performance and results.
Equity Vehicles – Options continue to remain the
primary vehicle of choice for pre-IPO/IPO firms. Key Learning –
Stock options remain significant motivators in the IPO environment, delivering
material upside wealth creation opportunities and longer-term retention.
Security Provisions – Severance and Change-in-Control
protection helps to provide added security for the employee and ensure business
continuity for the company due to the heightened risk of an IPO. Key
Learning – Ensuring that the leadership talent remains in place through
the use of employment agreements (and other tools discussed here) can help
provide stability, business continuity, and objectivity in the face of
uncertainty (many IPOs fail or are subsequently purchased).
Stock Ownership Guidelines – Formal Stock Ownership Guidelines
are a minority practice. Key Learning – Given that most of the
senior talent likely has sufficient alignment with shareholders, ownership
guidelines typically aren’t required until the business later matures.