Setting Your Equity Compensation Strategy

Once you’ve decided to take your company public, building an equity compensation strategy is a top priority.

“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 based rewards practice leader with Fidelity Workplace Consulting. 

Setting a compensation strategy and pay philosophy isn’t just important — it can be complex. Here are key considerations executives should keep in mind during the process.

1. Build the Right Team

Building an effective and properly aligned equity compensation plan requires collaboration. The right plan aligns the needs and expectations of multiple stakeholders. The board of directors, investors and executive management should work together on setting the strategy. 

“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 every IPO comes with the convenience of time, but giving your company 12 to 18 months before the planned public offering to set the compensation strategy is ideal. This timeline helps ensure the executive team, board and investors are aligned on the framework, and implementation of the plan. 

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

If your company doesn’t have an equity philosophy and plan, there are advantages to getting it set before you go public. Not only is it generally easier to approve new plans at a privately held company, but it also makes adding evergreen features possible. Evergreen features allow for automatic replenishment of the share pool — something public company shareholders generally vote against.  

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

Your soon-to-be-public company’s equity philosophy should become a component of your broader compensation strategy, if you already have one. This requires being competitively aligned with base salaries, the inclusion of a short-term incentive program design for executives and employees, as well as your equity program. In many industries, like tech or life sciences, equity compensation is the main leverage point for talent.  

“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 20 publicly traded companies will help your company understand the competitive landscape. Choose peers based on metrics such as industry, revenue, market capitalization, profitability and risk profile. Benchmark your grant sizing and grant design against these peers, and use them to understand the typical pay mix in your sector. 

6. Multiple Factors Determine Who Gets an Equity Stake

Deciding which employees should get an equity stake should involve a robust assessment. Taking a one-size-fits all approach to designing a strategy may not work effectively. Factors consider are both internal and external.

Internal Factors:

• The business plan and projected growth for the company
• The critical roles and key contributors to the success of the organization
• The amount of cash available to attract and retain employees
• If equity needs to be used as a greater focus of the compensation strategy

External Factors:

• The company’s peers
• Common market practice
• How competitive the recruitment markets are

7. Be Prepared for a Rigorous, Detailed Process

The way to approach an equity compensation strategy is with rigor and organization. Executives should establish clear processes that ensure the proper requirements, documentation, and approvals are in place for individual equity grants.

Once you have an initial plan, you’ll want to review your plan eligibility with respect to consultants, vendors and nonemployees. This will ensure it’s consistent with public company needs. It’s also important to decide whether board of directors’ grants should be granted from the general plan or if they should come from a separate plan.

8. There Are Pitfalls to Avoid

As with any complex process, setting an equity compensation strategy comes with opportunities to make mistakes. Here are some common ones to avoid: 

• Not including the right mix of shares that are used to deliver the awards
• Not providing competitive value in new hire and ongoing grant size
• Not communicating the program well to participants
• Not ensuring that enough shares are in the pool to cover business planning 

A strong, competitive equity compensation strategy can put your company in a great position headed into your IPO. With careful planning and these considerations in mind, you can move toward your future as a public company with confidence. 

The “Setting Your Equity Compensation Strategy” is reprinted from NASDAQ Ready, Set, IPO, August 2022, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity Workplace Consulting, a division of Fidelity Workplace Investing but modified by the author, Natalie Burg. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications. Information is provided for educational purposes only.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.