Monday Feb 11, 2013 by Justin Fossbender - Principal, Connell & Partners
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.