IPO Readiness: Executive equity compensation checklist

An IPO (Initial Public Offering) is a milestone for any business. It also marks a significant turning point for executive compensation as the change from private to public brings new stakeholders, new disclosure requirements and a new level of scrutiny. As benefits like liquidity become possible, so too do lockups, trading windows and the constraints of operating under material non-public information (MNPI) come into play.

Use the below to help identify what areas need focusing on to help make this transition as seamless as possible for your executives.

1) Establish a Compensation Committee early

This group will take responsibility for reviewing executive pay, approving new programs and overseeing the move from private company norms to public company expectations. Make sure you have representatives from all required stakeholders and specialist areas at the table, e.g. HR, legal, payroll, etc. Discussions should translate into clear actions with agreed timelines.

2) Build a credible peer group for benchmarking

Public company investors and advisors will want to see that pay decisions are anchored in a defensible framework. Selecting a relevant peer group can help the committee calibrate compensation levels and plan design choices.

A typical peer group:

• reflects similar business models and talent markets
• sits in an appropriate size range (often measured by revenue, assets or market cap)
• is large enough to be statistically useful (between 12 to 20 companies)

A poorly constructed peer group can unintentionally justify pay that is either too low to retain talent or too high to withstand scrutiny.

3) Right-size the share reserve before the window tightens

The pre-IPO period is often the best time to evaluate an equity plan’s share reserve and address any needed increases. After you’re public getting approvals becomes more layered. HR teams should partner with legal and compliance to ensure information is communicated to executives early in the process and that they have a clear understanding of the calendar and any constraints and practical planning considerations that may apply to them.

4) Codify your compensation philosophy (and prepare to disclose it)

Public markets expect structured, recurring long-term incentives with clear rationale and governance behind that decision making. A strong compensation philosophy typically clarifies:

• objectives and guiding principles: what you reward and why
• pay mix: salary, annual incentive, long-term incentives, benefits
• positioning versus peers: e.g., target percentile and rationale
• equity approach: types of awards, sizing philosophy, refresh cadence
• eligibility and governance: who gets what and how those decisions are made

5) Speaking of disclosing, be aware of the pay transparency rules that apply wherever you operate

In the US pay transparency has developed through a fragmented mix of state and local laws, creating significant operational complexity for organizations managing multiple jurisdictions.

Under the EU Pay Transparency Directive some of the requirements include measures like being open with job applicants on pay ranges, not asking applicants about pay history and publishing gender pay gap details that may exist within organizations.

A well-defined job architecture, setting out clear leveling criteria, consistent role definitions and documented expectations can help form the foundation of a robust pay transparency effort.

6) New rules mean planning for lockups, trading windows and the reality of MNPI

A whole raft of new rules, regulations, reporting requirements and restrictions apply once a company goes public. So, while an IPO can create the expectation of liquidity, executives are also the group most likely to be restricted from trading due to MNPI, blackout periods and pre-clearance rules which can close a window quickly.

As Bob Fritz, Head of Executive Advisory, J.P. Morgan Private Bank noted on Prosperity At Work, executives don’t want to be in a position where they need to sell (for taxes, diversification or life events) but can’t sell because of deal discussions or other insider information that they are party to restricting them. Listen to ‘IPOs, executives and volatility’ for more details.

7) Consider the importance of Rule10b5-1

A Rule 10b5-1 plan is designed to provide executives and others who are party to privileged information an affirmative defense against allegations of insider trading and allow them to sell stock under a pre-established written plan provided it’s set up properly, typically during an open window and when not in possession of MNPI.

Learn more about 10b5-1 plans.

8) Don’t assume your executives understand how it all works

Equity compensation is often the least understood component of pay, even at the executive level. Preparing for an IPO only adds further layers of complexity so knowing you’ve an experienced partner like J.P. Morgan Workplace Solutions onside to provide support at this time can help give you peace of mind.

If you’d like to find out more about how J.P. Morgan Workplace Solutions could help support your business and your executives through an IPO or other major corporate event, contact us today.