IPOs Don’t Guarantee Executive Pay Rises

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In the past 12 months a significant number of organisations have moved from private public ownership into the listed public company environment. A significant uplift in fixed remuneration for the executives of some of these organisations post listing has occasioned comment in the media.

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Although such increases can sometimes arise, they are by no means the rule. In fact, the first remuneration report post listing (which for a significant number of organisations discloses both pre- and post-listing reward arrangements) often highlights a substantial decline in total reward following listing.

The only pattern we have observed is a restructuring and rebalancing of reward to comply with general market principles and remuneration levels for comparable listed entities.

The reward arrangements of senior executives in pre-IPO organisations nominally embrace a similar structure to that widely accepted among listed companies: fixed remuneration, an annual incentive and a long-term equity-based incentive. Yet the relative proportions of these remuneration elements will vary widely depending on circumstance.

Where a management team has committed to spending two to five years to bring about significant change and create substantial value for investors in the pre-IPO entity, the value of their incentives can be substantial. This will often be aligned to the value created during the company’s unlisted ownership and can amount to several multiples of annual salary.

The relatively low level of fixed remuneration and high level of variable remuneration that results is less common in the listed public company environment. Therefore, when transitioning to a listed environment, organisations will often adjust fixed remuneration upward following listing, or will adjust it pre IPO to align with prevailing market conditions.

In other cases, where retention of top talent has been fundamental, there may have been significant payments under annual incentive plans or in fixed remuneration prior to listing. In these cases, downward adjustments are often made to annual cash remuneration.

One-off grants will also affect the level of reward, although they will not be a permanent part of the remuneration framework. Some companies will provide incentives to the leadership team for undertaking the necessary preparatory work to ensure a smooth listing and secure an attractive price from institutions and retail investors at the time of listing.

A number offer equity, generally in the form of a share right though occasionally restricted shares, which vests within the first two to three years of listing subject to the company meeting Prospectus forecasts following the listing.

Overlaid on all of these considerations will be the level of equity held by management, the terms under which that equity can be sold into the listing vehicle, the proportion of equity which is required to be held and the terms and period over which that equity must be retained by management moving forward with the listed company.

Such restrictions can delay the realisation of value to the executive team for their work prior to listing, maintaining a higher level of skin in the game than other executives beginning their tenure in the listed space.

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