IPO Companies Increasingly Using "Evergreen Provisions" to Bypass Public Shareholder Approval

A new survey published by Presidio Pay Advisors reveals an interesting and telling trend - a dramatic increase in the use of "evergreen provisions" to replenish stock option pools without need for public shareholder approval.

In its 2008 IPO Executive Compensation Survey, Presidio reports that the use of "evergreen plans" among IPO companies has increased nearly 20% each year for the past three years, a notable development in the midst of all the current hoopla around executive compensation (in general) and the say on pay movement  (in particular). 

More background on what it means to be "evergreen" from Presidio:

An “evergreen plan,” or a stock option plan with an “evergreen provision,” automatically gives boards of directors each year a renewable pool of stock shares to distribute to the company’s executives and employees as compensation. The term “evergreen” refers to the fact that the board needs to obtain authorization to institute the plan only once instead of every few years. ... Having an automatically renewable stock option plan removes shareholder oversight, and many see such provisions as a symptom of executive compensation excess.

Kyle Holm, a Principal at Presidio Pay Advisors, tells us a little more about what is going on behind the scenes in this trend:

About half the companies that went public in 2007 implemented "evergreen" provisions in their stock option plans prior to their IPO. Since they were still private when they implemented the provision, it only required the approval of their venture capitalists and board members, avoiding the stringent scrutiny from institutional investors and shareholder advocacy groups. On the other hand, when public shareholders buy the IPO stock, they are implicitly signing off on the evergreen plan.

This is a rather big deal, as our friends at Presidio make plain.  It will be interesting to watch how long/far the pre-IPO "evergreen" provisions are able to increase in prevalence, as awareness of their use and implications grows.

Comments

[Steve Buehler]

Hi Ann. We're huge fans of Compensation Force at Presidio Pay Advisors. Thanks for passing on our news to your other readers.

[Ann Bares]

Steve:

Thanks to you and your colleagues for keeping a watchful eye out for trends and developments in the areas where you practice and do research. We are all the better informed for it!

And, of course, thanks for reading!