Sign of the Times: Moribund IPO Market Drives Equity & Compensation Changes

Not only is the IPO (initial public offerings) market suffering from a severe case of the doldrums, it appears that tough times have forced some changes in financial and compensation strategies for IPO companies, according to new research from Presidio Pay Advisors.

Data from Presidio's newly released IPO Pay Reporter^TM reveals that over the past seven years founder CEO equity holdings have plunged, with median (founder CEO) ownership falling from a high of over 10% of total shares outstanding in 2002 to under 3% in 2008.

From the WSJ blog post on the research:

“Today, very few companies go public with limited revenue and nonexistent net income,” says Brandon Cherry, a principal at Presidio. “The prevailing IPO profile has shifted to a company with healthy revenue and positive net income, which is significantly affecting how compensation is delivered.”

That is a marked shift from earlier in the decade, when an Internet and technology start-up’s IPO highlighted the prospect of profits and even revenue in lieu of actual results. That approach worked in the early days of the commercial Internet, when just about any Web site could be semiplausibly touted as the next Wal-Mart Stores Inc. or AT&T Corp.

According to Cherry, companies are taking an additional two to three years to file for IPO in an effort to meet a more sustainable financial profile.  The most pronounced result of this is the dilution of founder CEO ownership; he sees this as likely due to less favorable term sheets or additional rounds of financing required to reach IPO.

Other key findings from the research:

• Companies in 2008 awarded and reserved fewer shares for grants to employees; median stock option overhang was at its lowest level in seven years.

• Since 2005, a 24 percent rise in median CEO base salary has been offset by a 25 percent decrease in annual cash bonuses, leaving total cash compensation essentially unchanged for both founder and non-founder CEOs.

• The mix between options and common stock ownership among all executives has undergone a transformation.  In 2002, executive officers had a stronger link to investor success, with over 85 percent of their ownership in the form of common stock and less than 15 percent in stock options.  By 2008, nearly 40 percent of executive officer ownership was stock options, which have no downside risk for executives, creating a potential disconnect between the financial interests of executives and company investors.  <Note from Ann:  I wonder if the current climate in public company executive compensation will impact and reverse this trend.>

Comments

[E James (Jim) Brennan]

Yes, both the highly-visible public hostility towards "morally hazardous" (in Fred Cook's terms) top executive pay packages and the observed developing practices of big firms are demonstrating that different direction, Ann. See http://www.erieri.com/index.cfm?Fuseaction=NewsRoom.Dsp_Release&PressReleaseID=166&CFID=383575&CFTOKEN=a2fc2bac0e31736b-D06D8120-CEC5-7B47-F74274A295B86746 for the latest quarterly update on exec comp trends at publicly traded corporations. The responsible majority have moved in the opposite direction, towards accountability, and the figures studied over time show it clearly.