Chapter 3: Guiding Principle case studies – IPOs and spin-offs

Initial public offerings: aligning compensation to reflect new owners’ priorities

May 1, 2018
Executive compensation guiding principles banner; aerial view of car driving through woods

By Scott Oberstaedt

As companies transition from privately-owned to publicly-traded companies, there is frequently a need to reconsider executive compensation (EC) policies so that they align more closely with investors’ expectations and public-company practices. Four overarching EC principles form the foundation of an effective EC program, and because an initial public offering (IPO), by definition, transfers ownership, the key overarching EC principles to consider are purpose and alignment.

Specifically, the role of EC in an IPO is to realign management’s interests from the purpose of one set of owners to that of another, as expressed through the company’s mission, strategy and objectives. Early efforts often focus on compliance and adherence to market norms, but an IPO also provides a unique opportunity to improve employee engagement and ensure that the executive pay program reinforces the company’s long-term business strategy, and is not dictated exclusively by external interests.

Similarly, in a spin-off, the source of purpose and alignment will shift from the parent company to those of new investors, whether public or private. Shifts in ownership will also mean transitions in management’s accountability. This chapter illustrates these concepts with two recent IPOs: one owned by a consortium of private equity firms prior to IPO (Trinseo) and the other a spin-off from a publicly-traded parent company (Knowles).

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