It has been a hot 18 months for companies going public in the US. Since January 2021, US exchanges have added 1,151 new companies to their ranks. What has not been as hot is the performance of these new companies since going public. The average return to date is negative -19%, with only 8% of those new public companies sitting in the green.
This lackluster stock performance in the past 18 months has added a major point of tension to the varying IPO dynamics and macroeconomic concerns when it comes to attracting and retaining key talent. Below are a few suggestions for boards and management to consider when setting compensation before, during and after going public.
Set a compensation philosophy that reinforces the long-term strategic plan.
The best compensation philosophies support the vision, mission, and long-term goals of the company. All too often, compensation is set by what everyone else is doing, especially for a pre-IPO company. When the mix of total rewards, the position to market, and the goals and objectives are all aligned with the vision, mission, and goals of the organization, the correlation to company success is significantly higher.
Conduct a market competitive total rewards analysis.
The company should conduct a market compensation analysis to determine competitive positioning of base salary, annual incentives, and long-term incentives relative to market. Oftentimes, due to the strategic decision to conserve cash, this analysis finds compression issues for employees below the executive team due to below market cash compensation and the potential for above market equity compensation.
When considering the common practice for pre-IPO companies is to grant equity compensation via a stock option (or option-like) vehicle, the current lack of share price performance means those equity opportunities are meaningless for recipients at present. As a result, these newly public companies face increased risks of retaining talent without decisive action (or improved share prices). Without a market study, these risks may go unnoticed until it is too late.
Consider compensation versus ownership.
Oftentimes management teams will put up their own capital alongside other investors to finance company operations in the early stages of the private company lifecycle. These are investment dollars – not compensation dollars – and should be considered as such when setting appropriate levels of compensation.
Allow for discretion.
There are lots of unknowns in the macroeconomic market environment; adding the complexities of being publicly-listed to that equation can double the cloudiness of the picture. Strategic business plans clarify a company’s direction and establish the path it will take to achieve its longer-term goals, but they also allow for course adjustments to respond to shifting dynamics that impact the business.
Similarly, the compensation program must be stable enough to attract and retain talent, but flexible enough to continue to provide the motivation and retention necessary to achieve a company’s business and strategic goals, especially when modified.
Balance internal and external market equity.
Inequities often exist in long-term incentive compensation, particularly during an IPO. Executives and other key employees who join a company prior to going public took risks and should be rewarded for completing a successful transaction. Staff that come on board during or after going public, often do not realize those same windfalls.
As a result, companies in these positions often face the challenging dynamic of having employee populations split into two categories – the “haves” and “have nots.” To course-correct, companies should reorient compensation in accordance with established compensation philosophy that will enable “equity in equity” going forward.
Variable compensation – no guarantees.
Companies are currently struggling with what to do next from a compensation standpoint. Cash resources/liquidity may be limited, and equity awards granted in connection with going public have under-delivered on paper value given current valuations. Volatile times require boards and management teams to maintain clarity on time horizons and the reality that equity compensation is variable in nature and intended to align recipient experiences with those of shareholders.
While certain circumstances may demand supplemental action (e.g. retention awards, “make whole” awards, etc.) the amount of stock awarded that is currently “in or out of the money” should not be a major factor in determining new equity grants going forward. Future grants should be market competitive in both value and design and aligned with the compensation philosophy set in the beginning.
Ensure compliance and good governance practices are in place. The executive compensation environment is ever-changing, with new “best practices” and regulations taking shape on a seemingly regular basis. Compensation Committees need to keep up-to-date on regulations and continually monitor the shareholder sentiment to reduce the chance of any surprise litigation or activism.
That stated, a Board and Compensation Committee’s responsibility is to serve the best interest of the shareholder. As has been well documented and debated in recent years, many times shareholder advisory service companies and shareholder activists are only serving their self interests and not the interests of long-term wealth creation for all shareholders.