The Challenge: A well known consumer business group was being prepared for listing by the private equity organisation that had purchased it some years prior. The target market capitalisation range was between $500 million to $1 billion.
Under the organisation’s stewardship, there had been a significant restructure and bolt-on acquisitions to strengthen areas of weakness in the Group. Part of the prior leadership team remained, but some talent, including the CEO and CFO, had been appointed by the new owners.
Executive reward entailed fixed remuneration that was modest by market standards; an annual incentive opportunity for the leadership team that was at a premium of 50% to 100% to traditional market standards; and a long term opportunity consisting of a significant shareholding to be accumulated over a number of years pending performance.
The Board of the company, consisting of representatives of both the private equity firm and external parties, sought Egan Associates’ advice on a relevant remuneration structure for the listed market.
In addition to the queries of the Board, prospective shareholders sought advice on the proportion of equity held by executives that could be sold at the time of listing, the period of escrow, and the proportions that might progressively vest over that period of escrow.
Egan Associates worked closely with the transaction’s legal advisers and their tax advisers to meet the expectations of shareholders and joint lead managers (JLMs) to the listing. The matters on which advice was prepared included:
- A reward structure for the incoming independent Directors;
- A template for new employment agreements for the leadership team;
- A relevant remuneration structure including fixed remuneration, short term incentive (STI) and long term incentive (LTI) for the leadership team including the CEO, CFO, other lead support executives and business group heads;
- A program foreshadowing remuneration at the time of listing, 12 and 24 months after listing;
- The timing for the award of equity (options and/or share rights) post listing, the period to vesting and the relevant performance hurdles and service conditions; and
The management of cash flow considering the proportion of bonuses, if any, that would be paid to executives; the timing of payments for any incentives due in the Financial Year up to the date of listing; and the structure and nature of performance criteria post listing other than those set out in the Prospectus.
(This advice involved financial modelling to highlight cash flow for the period immediately prior to listing, the period to the end of the first Financial Year as a listed entity, and the subsequent two financial years. The modelling was completed under certain assumptions in relation to fixed remuneration growth as well as maximum award values under both the STI and LTI given certain share price growth scenarios.)
Egan Associates prepared detailed plans in relation to:
- the performance criteria for the annual incentive program for the Financial Year of the IPO and the first full Financial Year following listing;
- the structure for the LTI plan and related performance conditions; and
- a review of the reward relativity between each executive level compared to the pre-IPO arrangements.
We built various calculators enabling the incoming Board and management to fully understand the outcomes of the various scenarios under consideration before finalisation of the remuneration structure and incentive programs post listing.
We also spent time with the incoming Chairman and Chair of the Remuneration Committee reviewing the implications of the scenarios and attended consultation meetings prior to the finalisation of the Prospectus with the company’s legal advisers, accounting advisers and taxation advisers.
Throughout the process Egan Associates supported our client by reviewing advices relevant to our task prepared by others. This ensured the advices were consistent and not in conflict. Where differences arose they were resolved in consultation with the current shareholders, the incoming Board; and the Chief Executive and Chief Financial Officer as appropriate.
The remuneration arrangements prior to listing were well received by the JLMs and institutional investors. The new remuneration structure received strong support at the first AGM by investors, who over-subscribed at the time of IPO. Post IPO, the share price improved above market trends and the Prospectus’ forecasts were met.
Immediately following the IPO, Egan Associates engaged with the Remuneration Committee of the new Board to:
- Review outcomes;
- Refine development of performance criteria for the short term incentive plan;
- Develop and tailor extension of the LTI plan to other selected executives and senior management; and
- Establish, in collaboration with the Chief Executive Officer, reward strategies that might arise as a result of some planned acquisitive initiatives and potential restructuring of the entity.