The Changing Face of Executive Compensation in IPO Companies
As part of the introduction to the IPO Pay Reporter™, our improved market-leading IPO compensation data services, we have conducted quite a bit of analysis on trends in executive compensation at companies that have recently gone public. What caught our attention the most was the significant reduction in ownership levels for founder CEOs of IPO companies. Ownership at IPO has been trending down for a number of years, but only in the last few years we’ve seen the fall off become significant.
While some would point to a small sample size, this argument is really only relevant for 2008 when 16 companies had initial public offerings. In reality the continuous drop in ownership has come over several years when an average of 100 companies per year made an initial public offering. Granted, this is nothing like the 1990s, but this is the reality of the first decade of the 21st century. Fewer companies are going out, and those that do have fundamentally changed from what we were used to seeing in the 1990s.
So what else has changed? The big surprise for us was the shift away from common stock ownership and a shift to stock options for Chief Executive Officers. This is significant because options are a much less risky proposition. Until an option is exercised, the executive has not invested any capital in that option and has no risk of loss. So with executives holding fewer common shares and more options, they are free to make riskier bets in an effort to drive the spread on their options up. Meanwhile, this may not be in the best interest of the shareholders, who have invested capital into the company and have a significant loss potential. Our Senior Consultant Dave Bisson has written a white paper, The Trouble With Options, that explains this conundrum much more elegantly.
One of the offsets to this drop in equity ownership for founder CEOs is the increase in base salaries. Over the same time we saw ownership drop, we’ve seen base salaries jump 20%. Because base salaries have a strong correlation to company size, its not suprising to see this increase considering companies that have gone public in the last few years are much larger in terms of both revenue and market capitalization. Interestingly, annual cash bonuses dropped by 20% leaving total cash compensation virtually unchanged.
So what does all this mean to a company that sees a public offering in the future? Consider all of these factors and how they will impact the way in which employees are motviated: Does your company have a compensation philsophy and strategy that aligns employee behavior with shareholder return? Are you prepared to comply with the disclosure requirements of your compensation programs? For more information on how these trends will impact you as a public company, download our white paper on Preparing Compensation Programs for Life as a Public Company.
