Companies considering a public offering should ensure the placement of a well- conceived compensation program which will support the company’s strategy and competitive positioning. The critical reasons why companies should look at compensation are to:
Support the company’s strategy via compensation programs
Compensation programs exist to effectively attract, motivate, and retain personnel to execute corporate strategy. As a public company, a key strategy is to increase shareholder value. The compensation program, therefore, should adequately communicate the performance measures that drive value, and share a portion of the value creation with employees.
Consider competitive pay levels and mix
Company salary data for top executives will be available to shareholders and the general public for what is probably the ﬁrst time. Registration statements and annual proxy disclosures require detailed reporting of base salaries, annual cash bonuses, perquisites and beneﬁts, stock option grants, and any other long-termincentive grants. Speciﬁc data is required for the CEO and the four other most highly paid ofﬁcers, as determined by salary and annual bonus. It is critical that compensation is reasonable, relative to industry practices and to the company’s strategy and performance. Unreasonably low pay will attract recruiters, while high pay will attract unwanted criticism by investors and analysts.
Satisfy investor desires for management “ownership”
Investor groups generally want management and directors to hold an ownership interest. This helps ensure that adequate management attention is given to increasing shareholder value. It also provides retention incentives for key executives, particularly if grants vest over time. In fact, in a special study reported in The New York Times on executive pay published in April 2000, indicated that most companies require chief executives to own stock worth three to ﬁve times their annual salary. The ratio declines for lower-level executives, usually down to one and a half times salary. The ownership interest may be actual shares, or more commonly, options to purchase shares in the future.