Examining Executive Compensation for Companies Undergoing Initial Public Offerings

Posted: August 11, 2020

After the initial two quarters of 2020, it is clear that Initial Public Offerings are at a low point due to the impacts of COVID-19 globally and especially in the Americas. With uncertainty in the market, many companies that had plans of going public are finding their plans halted. One example of a company that decided to wait in the early stages of the pandemic is Vroom, an online car sales platform. After some months of increased sales and success due to car dealership sales slowing, Vroom decided to go public at the end of May and more than doubled it’s share price on the first day of trading. There are other examples of companies going public towards the end of Q2, but overall 2020 saw IPOs come to a standstill. Companies that are well situated in this specific climate are more likely to consider an IPO. As more private firms begin to make the move towards going public in the second half of the year, what does that mean for executive compensation? Executive compensation programs in private companies differ from the compensation programs of public firms. The transition towards an initial public offering is more than just selling shares publicly. It involves a change in compensation strategies and approaches as well. Many corporations going through this transition benefit from a thorough audit of all pay practices to better establish what needs attention. There is an opportunity to update the executive compensation structure in order to modernize and appease stakeholders. Additionally, publicly traded companies face more regulations, including more transparency with executive compensation programs. Establishing a compensation philosophy when an initial public offering is being prepared is vital for companies to transition smoothly. It can help to retain and motivate a talented executive staff during and after the IPO. This compensation philosophy can help companies steer towards success after the initial excitement of the IPO has subsided. It is worth noting that with the growth during and after an initial public offering, differentiation increases in the workplace. Executives that wore many hats may begin to specialize more as liquidity increases. This is another factor that can be addressed by a compensation philosophy that prepares for the changes during and after going public. As companies move out of the private sector, cash-flow will become more prevalent, changing the pay structure for executives. Many pre-IPO corporations rely on a higher ratio of equity incentives for its executives because of the lack of capital available. As a result, salaries and bonuses are often less for executives of these venture-backed corporations. When transitioning to become a public company, the type of equity that is awarded is one of the biggest changes in executive compensation. Private companies often rely on time-vested restricted stock, with fewer performance-based awards. This is due to the challenge of dramatic shifts annually in the operations and strategies of private companies. Post IPO companies tend to rely on a mix of performance and non-performance based awards, which generally appease stockholders and align executives with current strategies. Companies that are considering an initial public offering in the last half of 2020 and in the wake of COVID-19 will inevitably need to address their executive compensation philosophy in anticipation. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.