January 16, 2015
The past two years have produced a large number of U.S. companies that have undergone initial public offerings (IPOs). With the current IPO market alive and well, the amount of anticipated offerings appears likely to remain strong throughout 2015. Companies deciding to go public receive numerous benefits in bringing their enterprise to market, but also face certain challenges that correspond to becoming a publicly traded company. At the outset, companies are required to start filing regulatory documents with the Securities and Exchange Commission. Along with the additional disclosure requirements, there are various compensation and governance decisions that need to be determined in conjunction with the offering. Companies must consider various matters prior to the IPO, including the key executives who will be leading their companies through the process, the structure of common stock, whether to include evergreen provisions in equity compensation plans, and if special awards should be granted to executives related to the IPO. The following analysis provides detailed information regarding the 177 companies that went public in 2013 and how they chose to approach these compensation and governance decisions.
One of the most important questions asked when becoming a publicly traded company is who will be leading the company through the offering and onward. The majority of companies establish leadership teams years in advance of the IPO, although there are some companies who hire executives in anticipation of a forthcoming IPO. Out of the 625 executives at the 177 companies that went public in 2013, 97 executives were hired within the year preceding the IPO date. Chief Executive Officers and Chief Financial Officers are often the most scrutinized executive positions, and as a result, there were 19 CEOs and 33 CFOs who were hired within a year prior to their IPO at the 177 companies that went public in 2013 (as seen in the diagram below).
The way in which stock is structured, either through single or multiple classes, can provide specific advantages to those who are looking to retain strong voting power following an IPO. Establishing multiple classes of stock is one way for certain individuals to retain strong voting power by allowing different classes of shares to range on voting power while still maintaining equal economic rights. Multiple class stock structures were implemented at a fraction of companies that went public in 2013, with 24 of the total 177 companies creating multiple class stock structures. The percentage of IPO companies with multiple class stock structures is slightly larger than companies within the Russell 3000 (as seen in the graph below).
Choosing between a single class stock structure and a multiple class stock structure has become a focal point in corporate governance. While institutional investors have frequently opposed multiple class stock structure implementations, several influential technology companies including Google, Facebook, LinkedIn and Zynga have adopted them in recent years. Tableau Software is an example of a technology company that went public in 2013 and also adopted a multiple class stock structure. Although technology companies often receive the most attention for these decisions, they are not the only industry establishing multiple classes of stock. Companies within the real estate sector (Re-Max Holdings) as well as the utilities sector (NRG Yield) have also chosen to create multiple class stock structures as they became publicly traded in 2013.
IPOs can produce several new challenges to the individuals responsible for establishing compensation programs, specifically equity compensation plans. Selecting an optimal number of shares available for issuance is a complicated task, as is choosing whether a plan has the ability to automatically increase the number of shares available to grant (an evergreen provision).
Since evergreen provisions have the ability to dilute shareholders’ equity by automatically increasing the number of shares available for grant under equity compensation plans, certain institutional shareholders have often voiced their opposition to these provisions. Of the 177 companies that went public in 2013, more than half (108 of 177) did not include evergreen provisions in their equity compensation plans. However, the percentage of IPO companies with evergreen provisions is significantly higher than companies with the Russell 3000 index (as seen in the chart below).
Successful completion of an IPO can often be rewarding to both new shareholders and company executives. One way companies can have strong offerings is by granting special awards to executives who either vest upon a successful completion of the IPO or only realize value if the ensuing stock price is higher than the IPO price. There were 34 companies that went public in 2013 which granted special awards to their executives related to the IPO. Of those companies, 18 granted special awards to all of the named executive officers (NEOs) while 16 companies granted special awards to only certain NEOs. Pinnacle Foods (PF) granted special awards to all of its NEOs in connection with their IPO.
Pinnacle Foods (PF)
DEF 14A filed on April 30, 2014
“On March 27, 2013, in conjunction with our IPO, each named executive officer was awarded a ‘Founders Grant’ under the 2013 Omnibus Incentive Plan consisting of non-qualified stock options. The awards were given to each of the named executive officers in an effort to ensure that the executives’ interests are closely aligned with the shareholders’ interests, and the compensation is only earned to the extent that the share price rises above the IPO price. Award amounts were determined based on the individual’s level within our organization as well as market practice for long-term incentive awards.”
While deciding whether executives should receive special awards related to an initial public offering, companies must also determine which kind of equity to potentially grant. Restricted shares or restricted stock units which only vest upon a successful IPO can incentivize executives to achieve strategic goals related to a company’s offering. Stock options can promote sustained growth following an IPO by aligning the potential appreciation of the stock price with executives’ equity ownership. Even with a careful equity vehicle selection and an appropriate size of grants, initial public offerings will often only be viewed as successful if companies raise the capital initially envisioned. Sustaining long-term growth following an IPO enables companies to feel confident that taking the company public was the right decision.
Please contact Dan Marcec at email@example.com for more information. Dan Marcec is the Director of Content & Marketing Communications at Equilar. The contributing author of this article was Garret Sturgis, Senior Research Analyst.