Industry Leading Survey Highlights Critical Need for Data-Driven Performance Metrics and Importance of Aligning Compensation with Marketplace Both Before and After an IPO.

Leading global professional services firm Alvarez & Marsal (A&M), has released a survey of 272 newly public companies, analyzing executive compensation package trends at companies that recently launched initial public offerings. Conducted by A&M’s Compensation & Benefits group, the “2021 Initial Public Offering (IPO) Compensation Report,” demonstrates the impact of compensation programs on executive recruitment and retention and the importance of established performance metrics for newly public companies. 

Managing Directors, and report authors, Brennan Rittenhouse, John Schultz and Jeff Swerdlow based their findings on examined proxy statements of companies, with median market capitalization of approximately $488.5 million, that went public over the past two-plus years. The report reinforces the need for baseline performance metrics at companies going from private to public to meet institutional investors’ need for quantifiable, objective data.  

Mr. Swerdlow said, “Once a company enters the public market it does not have much flexibility, therefore determining issues such as the size of and how to allocate the pool, in advance of the IPO is critical. Developing an IPO roadmap ensures executive compensation programs and policies are market competitive, adequately sized for future needs, compliant with governance requirements and aligned with executive and shareholder interests.”

A&M reports that, while base salary remains an important component of pay, an especially integral part of the package is incentive compensation, both long-term incentives (LTI) and short-term incentives (STI). On average, incentive compensation, including annual and long-term incentives, comprises approximately 79 percent of CEO and 73 percent of CFO total compensation, with LTI comprising 68 percent and 60 percent, respectively.

A&M determined LTI is the most significant driver of pay differences. Companies grant LTI awards to motivate and retain executives and to align the interests of executives and shareholders. Those awards generally consist of stock options and stock appreciation rights (SARs). 

Other key findings from the Alvarez & Marsal report include:

Total Compensation – 

• The median CEO total compensation is approximately $980,000 while the average CEO total compensation is approximately $2.9 million. For CFOs, the median total compensation is approximately $649,000, while the overall average CFO total compensation is approximately $1.4 million.

Annual and Long-Term Incentive Compensation – 

• On average, incentive compensation, including annual and long-term incentives, comprises approximately three-quarters of CEO and CFO total compensation packages with 79 percent of CEOs and 73 percent for CFOs.
• A single award vehicle was the most prevalent approach (73 percent of companies). Twenty-three percent of companies utilized two vehicles for their LTI program. 
• The most prevalent LTI award vehicle, used by 83 percent of companies, is time-vesting “appreciation-only” awards 
• Time-vested “full-value” LTI awards are utilized by 30 percent of companies. 
• Performance-vested LTI awards are utilized by 22 percent of companies.
• For performance-based LTI awards, the most common performance metric, used by 35 percent of companies, is milestone achievement measures, with a three-year common performance period, used by half of the companies.

Short-Term Incentive Compensation – 

• Eighty-six percent of companies utilize a short-term incentive plan that is at least part discretionary. Only 14 percent utilize STIs where the payout is determined on a purely formulaic basis with no Board discretion.
• The most prevalent performance metric in STI plans are profit-based measures. They are utilized by 27 percent of companies. 
• The next three most prevalent performance metrics in STI plans are milestone achievements at 23 percent, revenue measures at 21 percent and operational measures at 12 percent. 

Pre-IPO Share Pool Authorizations and Named Executive Officer (“NEO”) Grant Allocations –

• The average pre-IPO equity share pool authorization as a percent of total shares outstanding was approximately 12.6 percent. The median share pool size was approximately 10 percent of total shares outstanding. 
• Approximately 68 percent of IPO companies utilized an “evergreen” provision for their share pool allocation, rather than a fixed number, of the total shares outstanding.
• Equity grants to CEOs in the year of the IPO represented on average approximately 17 percent of the available share pool. The median was approximately seven percent.
• Average grants to CFOs reflected approximately seven percent of the available share pool with three percent at the median. 
• Grants to the CEO in the year of the IPO represented on average 1.45 percent of total shares outstanding. The median was 0.56 percent.
• Grants to the CFO on average reflected approximately 0.4 percent of total shares outstanding. The median was 0.1 percent.
• Grants to all NEOs (including the CEO and CFO) in the year of the IPO accounted for approximately 28 percent of the available share pool on average and reflected approximately three percent of total shares outstanding on average.

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems.

With over 5,000 people across four continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

To learn more, visit: AlvarezandMarsal.com. Follow A&M on LinkedIn, Twitter, and Facebook.

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