Setting Your Equity Compensation Strategy


Once you’ve determined to take your organization public, constructing an equity compensation technique is a prime precedence.

“Whether to provide some form of equity-based compensation is a critical decision a company can make as it develops its plan to go public,” says Andy Welt, SVP and broad primarily based rewards observe chief with Fidelity Workplace Consulting. 

Setting a compensation technique and pay philosophy is not simply necessary — it may be complicated. Here are key issues executives ought to bear in mind through the course of.

1. Build the Right Team

Building an efficient and correctly aligned equity compensation plan requires collaboration. The proper plan aligns the wants and expectations of a number of stakeholders. The board of administrators, buyers and government administration ought to work collectively on setting the technique. 

“It is important for executives and owners to educate themselves about various equity-based and equity-like incentives and how they work,” Welt says. “This way, both parties can end up with a plan that suits all their needs.”

2. Your Plan Will Take Time

Not each IPO comes with the comfort of time, however giving your organization 12 to 18 months earlier than the deliberate public providing to set the compensation technique is good. This timeline helps guarantee the manager group, board and buyers are aligned on the framework, and implementation of the plan. 

3. If You Start from Scratch, Get a Head Start

If your organization would not have an equity philosophy and plan, there are benefits to getting it set earlier than you go public. Not solely is it typically simpler to approve new plans at a privately held firm, but it surely additionally makes including evergreen options doable. Evergreen options permit for automated replenishment of the share pool — one thing public firm shareholders typically vote in opposition to.  

4. If You Have a Compensation Strategy, It’s Time to Align

Your soon-to-be-public firm’s equity philosophy ought to turn out to be a part of your broader compensation technique, if you have already got one. This requires being competitively aligned with base salaries, the inclusion of a short-term incentive program design for executives and staff, in addition to your equity program. In many industries, like tech or life sciences, equity compensation is the principle leverage level for expertise.  

“In many ways, it is the ‘pixie dust,’” says Welt. “So, if the company does not effectively align — and, most importantly, communicate that — they may fall short of meeting their objectives.”  

5. Establishing a Peer Group is Essential

A peer group of 15 to twenty publicly traded corporations will assist your organization perceive the aggressive panorama. Choose friends primarily based on metrics similar to trade, income, market capitalization, profitability and threat profile. Benchmark your grant sizing and grant design in opposition to these friends, and use them to know the standard pay combine in your sector. 

6. Multiple Factors Determine Who Gets an Equity Stake

Deciding which staff ought to get an equity stake ought to contain a strong evaluation. Taking a one-size-fits all method to designing a method might not work successfully. Factors think about are each inside and exterior.

Internal Factors:

  • The marketing strategy and projected progress for the corporate
  • The crucial roles and key contributors to the success of the group
  • The amount of money out there to draw and retain staff
  • If equity must be used as a higher focus of the compensation technique

External Factors:

  • The firm’s friends
  • Common market observe
  • How aggressive the recruitment markets are

7. Be Prepared for a Rigorous, Detailed Process

The technique to method an equity compensation technique is with rigor and group. Executives ought to set up clear processes that guarantee the right necessities, documentation, and approvals are in place for particular person equity grants.

Once you may have an preliminary plan, you’ll need to evaluation your plan eligibility with respect to consultants, distributors and nonemployees. This will guarantee it is in line with public firm wants. It’s additionally necessary to determine whether or not board of administrators’ grants must be granted from the overall plan or if they need to come from a separate plan.

8. There Are Pitfalls to Avoid

As with any complicated course of, setting an equity compensation technique comes with alternatives to make errors. Here are some frequent ones to keep away from: 

  • Not together with the right combination of shares which might be used to ship the awards
  • Not offering aggressive worth in new rent and ongoing grant measurement
  • Not speaking this system properly to members
  • Not making certain that sufficient shares are within the pool to cowl enterprise planning 

A robust, aggressive equity compensation technique can put your organization in an important place headed into your IPO. With cautious planning and these issues in thoughts, you may transfer towards your future as a public firm with confidence. 


The “Setting Your Equity Compensation Strategy” is reprinted from NASDAQ Ready, Set, IPO, August 2022, as a part of a paid commercial by Fidelity Stock Plan Services, LLC. The statements and opinions expressed on this article are primarily based on insights supplied by Fidelity Workplace Consulting, a division of Fidelity Workplace Investing however modified by the writer, Natalie Burg. Fidelity Stock Plan Services, LLC can’t assure the accuracy or completeness of these modifications. Information is supplied for academic functions solely.


The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.

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