Amid fluctuating market conditions, the outlook for initial public offerings (IPOs) on U.S. exchanges in 2025 remains cautiously optimistic, with indications of a potential rise in both the number and aggregate value of public listings in the latter half of the year.
Privately-owned companies considering an IPO should consider taking the following steps to ensure that their executive compensation plans and governance policies are aligned with both continuing and new shareholder expectations. All companies considering an IPO should be able to answer 10 critical executive compensation and governance questions before going public.
01
This includes selecting a peer group for market data and trends and agreeing on how the company expects its executive compensation to compare to those peers vis-á-vis target value and pay mix. A peer group also can help inform a board about trends in other topics like benefits, employment agreement terms or incentive plan designs.
02
This could include increases in salary and/or target annual bonus, or new long-term incentive awards (e.g., stock grants) in the new public company. Typically, companies that are planning to go public will benchmark their executive pay levels against other public companies to identify any specific gaps between current target pay and typical public company market rates.
03
These could include equity-like arrangements in the private company that need to be valued and possibly paid out, or loans made by the company to executives that must be repaid.
04
While not required, employment agreements can lock in key terms and conditions of employment. This includes any potential severance payments if the executive is dismissed from their role for reasons other than cause.
05
Public companies listed on a U.S. exchange need to communicate executive and director pay levels to their shareholders, starting with the S-1 statement filed prior to the IPO. The level of disclosure required varies based on the size of the firm and whether it qualifies as a foreign private issuer.
06
Whether staying on the board post-IPO or joining the board at the time of listing, non-employee members of the board will expect to be paid for their service. The most common element of this pay package are a cash retainer, an annual stock award and additional compensation for special leadership roles (e.g., chairing the board or one of its committees).
07
While not required, public companies are more likely to have pre-set performance goals, usually a majority of which are financial goals like revenue or net income. They also are likely to have metrics that determine the bonuses that executives can earn in a given year rather than a bonus pool that is entirely discretionary.
08
Having public company stock that can be granted to executives is one of the most appealing elements of being a public company. Stock options, restricted shares and performance shares are all common vehicles. Prior to the IPO, the company should establish a pool of shares that can be used to make these stock awards, the values to grant to selected participants, and the terms and conditions for each award. The pool also should take into account projected burn rates and dilution caused by both existing and future shareholders.
09
ESPPs are a popular way for employees at all levels of the company to become shareholders, and they can offer financial advantages to participants if structured correctly.
10
U.S. public companies commonly adopt policies and rules that align executive interests with their shareholder interests and can show that the company is being proactive on good corporate governance. These can include incentive plan recoupment (clawback) rules, stock ownership guidelines and anti-hedging rules, among others.
While there are many other topics related to executive compensation and governance that all public companies need to review, considering these 10 questions prior to listing can help a company get ahead in the process and set itself up for success.
