The Hewitt Associates study found that firms with new initial public offerings (IPO) gave executives 3.5% of outstanding shares in 2003 – up dramatically from the 2001 figure of 0.3% and nearly back to 1999’s 4.2%.
Hewitt said the same trend holds true for senior executives of corporations spun off from other companies. Specifically, the top five leaders went from equity holdings representing approximately 0.7% of post-IPO ownership in 1999 to 0.5% from 2000 to 2002. By 2003, that number increased to an average of 1.1%.
Hewitt’s analysis also revealed a correlation between pre-IPO ownership value and size of stock-based grants made at the time of the IPO. In particular, the higher a CEO’s pre-IPO ownership value, the lower the IPO award. For instance, CEOs who owned pre-IPO equity of at least eight times their salary prior to the IPO received an average IPO equity grant valued at 75% of a typical annual grant. Meanwhile, CEOs who owned less than eight times their salary in equity prior to an IPO received an average grant that was more than 200% of a typical annual grant, Hewitt said.
“Equity grants can enforce a pay-for-performance mentality that is critical in a transition, such as becoming a public company,” Ryan Harvey, a Hewitt Associates senior consultant, said in a statement. “However, companies need to strike an appropriate balance, determining the size of IPO grants only after considering many factors, including existing executive ownership levels and ongoing ownership targets. Managed correctly, an executive pay-for-performance program, such as this, will go a long way toward ensuring IPO success.”