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Companies listing today increasingly using an IPO as opportunity to give shares to all employees

3 April 2014

  • Over a quarter of companies gave free shares to all employees at IPO
  • Almost three quarters of companies disclosed incentive plans for executives and employees linked to the IPO event
  • Senior management typically have significantly higher shareholdings than in established listed companies
  • Fee levels for non-executive directors often higher than typical market levels

Deloitte provides detailed analysis of remuneration practices at IPO in companies listing since July 2010.

Incentives linked to the IPO
The majority of companies (70%) disclosed the operation of incentive plans pre-IPO which were linked to the IPO event. While these plans may more commonly be focussed on directors and senior management (for example a one-off award of shares as part of the transition into the listed environment), over a quarter (26%) of companies operated plans which allowed for awards of free shares to all employees of the company*.

Mitul Shah, partner in the remuneration team at Deloitte, comments: “Companies listing today are increasingly using the IPO as an opportunity to give shares to all their employees and are not just focussed on senior management.

“An IPO requires commitment from all employees but provides the opportunity to introduce share plans which motivate the employees during this process. These plans can not only be used to help “lock-in” key executives and senior management but are also a great way to reward all employees and to share in the value created from a successful IPO.”

Shareholding
It is common for the senior management of newly listed companies to own a significant number of shares in the company at the time of IPO. The median aggregate share interest for directors and senior managers was around 7% of the share capital and 5% after excluding the founder shareholders. Typically senior management have these shares locked-up for 12 months after the IPO, during which time they cannot be disposed of.

Shah comments: “Management shareholding in recently listed companies is typically much higher than in established listed companies. In part this reflects that the founder shareholders are often still part of the management in these companies, but it also illustrates the practice of operating pre-IPO incentive plans which allow management to receive significant numbers of shares in return for delivering superior returns for the shareholders, culminating in the IPO. This helps align the interests of management with all shareholders after the IPO.”

Non-executive directors
As part of the transition to the listed environment, most companies coming up to IPO will need to appoint one or more independent non-executive directors in order to comply with corporate governance guidelines. Fee levels for these positions, at the time of the IPO, were higher than those in comparable listed companies in around 50% of the companies in the sample.

Shah comments: “It is important to recruit the right calibre of non-executive directors in the run-up to IPO, particularly where the management team does not have significant recent experience of running a listed company. The higher fees may reflect these requirements and also, to some extent, the additional workload required during the transitioning process.”

Salaries
There is a wide variety of practice around salaries in newly listed companies. Unlike in established companies, where salaries are strongly aligned with the size and complexity of the business, other factors tend to influence salaries at the time of IPO. Around 40% of the CEOs in place at the time of the IPO were paid below typical market levels and around 25% were paid above.

Shah comments: “The spread of salaries may reflect the backgrounds of the individual directors: some are founder members of the company; others are newly recruited to lead the flotation process, and this can influence the level of salary they are paid.”

Bonus and long term incentive plans
The overall way in which remuneration is structured, post IPO, in newly listed companies is very similar to that in established companies. Most companies intend to operate an annual bonus plan and the opportunities in these plans are in line with typical market practice. Making at least part of the payouts from these plans in deferred shares, now common in established companies, is also apparent in recently listed companies, with over half including some element of deferral in the bonus plan**.

Most (92%) newly listed companies intend to operate a performance share plan***, structured in similar ways to those used in established companies. Very few newly listed companies plan to use share options as part of the remuneration package which supports the general trend in established companies

Clawback and malus provisions
We have seen clawback and malus provisions**** become common practice in listed companies (83% of FTSE 100 companies, 58% of FTSE 250 companies, and 50% of FTSE SmallCap companies). Interestingly the majority of companies have also introduced these provisions at IPO. Around 80% of annual bonus plans in place at IPO and around 60% of long term plans include clawback and/or malus provisions.

Shah said: “It is very important that remuneration structures do not reward failure, and these measures offer protection for shareholders. The provisions allow companies to reduce share awards which have not yet been released to participants or to recover amounts already paid, where these turn out to have been based on incorrect results, or where there has been any form of misconduct.”

Conclusion
One of the many important issues to be addressed as part of the transition from the private to public environment is that of how management are to be paid in the run up to and post IPO.

“Considering the balance of the overall remuneration package is crucial, to ensure a smooth transition into listing and beyond. Having the right arrangements can send positive signals about the company’s approach to corporate governance, and help engender confidence in investors. Spending time ensuring the arrangements are fit for purpose in the listed environment is likely to be time well spent.”

End

Notes to editors

* Most of these companies operate the HMRC approved Share Incentive Plan.

** Bonus deferral typically involves a portion of the annual bonus earned being held back and delivered in shares between one and three years later.

*** Performance share plans (PSPs) award free shares subject to continued employment and company performance, typically over at least three years.

**** These provisions allow the company to recover or reduce deferred share awards in the event that the performance on which the original award was based turns out to have been misrepresented in some way or is not sustained over the deferral period.

About the study
This report has been compiled from the study of the listing documents and remuneration reports of companies joining the London Stock Exchange main market by way of an IPO from July 2010 to February 2014. Investment companies have not been included in the report.

The report focuses on the 27 companies that achieved a premium listing where the market capitalisation at admission was in excess of £50m. A large percentage (44%) of the companies were majority owned by private equity firms for whom IPO represented an opportunity to realise return from their investment.

The companies range in size from £55m to £35.5bn based on the average market capitalisation for the first month from admission (or on 5th March 2014 for the two companies that listed at the end of February 2014).

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited.

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