An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. An IPO allows a company to raise capital from public investors by offering shares through the primary market. Despite uncertainty in the market last year, there were a total of 50 IPOs on the London Stock Exchange in 2020, a slight improvement on the 36 recorded in the previous year. An IPO is a big step for a company with the added investment providing them a greater ability to grow and expand.
Taking a company through an IPO is not a sprint nor a marathon, it is a slow and steady race. The result is less crossing a finish line and more akin to a transformation and a rebirth. The process will cause shockwaves through all elements of the business and keeping staff engaged, productive and positive throughout is key in making the event a success. Including HR and Reward in the conversations early in the process and finding a Reward specialist who is experienced in delivering the right incentives and behaviours for staff can be critical to the success of an IPO.
Selena Farooqi, Associate Partner specialising in Reward within our HR Practice, met with Paul Henriques, VP of Total Reward at Gorillas, to talk about his journey taking Adevinta through a high-profile IPO in April 2019. At the time, it was the largest IPO in Norway for 10 years. In this article, Paul will share his experience in making the remuneration side of IPO straightforward and, most importantly, how a concentrated approach and strategy can make or break your company’s success through IPO and beyond.
How can reward influence the outcome of an IPO?
IPO’s are commonly treated as a one -off event, however the challenge does not stop at listing, and ensuring the company is successful after listing poses its own complexities. These events can create conditions of extreme pressure and stress that can linger well beyond the IPO effective date. Few organisations go into IPO activity understanding the psychological toll on employees. Reward helps this process by developing programs to keep employees motivated during the IPO life cycle and well beyond, ensuring that staff are appreciated and recognised for their efforts. If an IPO is successful, not only will the company come through with its workforce intact, but a workforce that is energised enough to continue growing.
“It’s important to consider reward at every stage of the journey, as the conversation will be different at different points.”
What external forces can influence reward during an IPO?
Essentially there are three external forces which will have a bearing on pay and incentives during an IPO.
- Benchmarking – this is the start of the process. Benchmarking provides a baseline in terms of designing Reward programs, most often equity and variable bonus plans, and provides the framework for alternatives and considerations when you start the IPO journey. Benchmarking can be particularly useful when you start having discussions at C-Suite level, and this is often when expectations begin to be set around benefiting financially from the IPO activity. Benchmarking will help level-set expectations and position what is realistic within the market and relevant comparator organisations.
- Proxy advisors – These organisations advise investors on whether they should vote on remuneration programs or policies. Investors can derail or support remuneration strategy so you want to ensure that executive incentive proposals are in line with proxy expectations and recent advice.
- Recent IPO activity and paying close attention to other companies of a similar size and scope. Researching the packages on offer by other listed organisations of similar size and scope (not necessarily in the same sector/industry) can round out the information gathered during benchmarking. What has been successful for those in a similar situation can give some weight behind remuneration policies for investors.
Considering reward philosophy for successful IPO
Designing a reward philosophy “can get quite nebulous,” says Paul. “There are so many elements that watered down, and the meaning gets lost.” The meaning that Paul is talking about is to ensure that employees remain motivated, especially through the IPO journey, and stick with you through the challenging times of IPO and beyond.
In reality, there are three stages of the IPO process, which must be considered from the outset, and different rewards should be offered at each point to ensure that staff remain engaged and productive. There are a range of remuneration tools to call upon.
At the onset of an IPO announcement, employees will feel the initial excitement and rush. But that soon turns into uncertainty. “You need to remember this might be a frightening time for staff, who have in effect signed up for one company, and are now going to find themselves working for another.”
Prior to the IPO announcement, Reward can be brought into the loop and have at the ready a retention scheme to keep key employees with the organisation through the IPO life cycle. This can release some of the psychological stress and keep employees engaged throughout the entire timeline.
Around the middle point of the IPO activity, details surrounding the new cash and equity schemes can be communicated, of course once the requisite approvals have been secured. At this stage, employees will then be given the information they need to commit to the organisation longer term. Transparency and clear communication on equity plans is extremely important at this stage. Roadshows and lunch and learn are extremely beneficial, also, as employees can ask detailed questions on the specifics around the new post-IPO plans, including vesting and performance metrics. The important question to answer for employees is, “what’s in this for me after the IPO and how can I ensure that what I do today is adding value in the longer term?”.
Once it’s all over, you should consider how to reward staff for their loyalty throughout the IPO process and beyond. In this candidate-led market, many companies are struggling to hold on to quality talent. It’s imperative that you consider ways to retain your workers during a transition of this magnitude. It is often best to have ‘softer’ Reward item at this point to recognize the effort and work that has gone into the IPO. Recognition programs where employees can nominate one other are helpful, as are mental health days to recuperate from the cognitively taxing work, additional vacation days are just some examples of items that can be rolled out fairly easily, but with a high rate of value return.
Different types of equity and other tools
There are a number of different types of rewards which can be used as tools to ensure staff remain on board with the IPO process.
Cash rewards are immediate; however, cash payments leave nothing to incentivise for future work or engagement.
An equity program centred on stock options or restricted share units can be useful, because staff need to remain with the organisation in order to realise value. You can tie the rewards to performance goals and objectives, which help with productivity and organisational achievement of goals.
Paul warns against the current tendency to deliver equity long into the future, say 4-5 years. “Employees and executives hate this and I will not be the first person to say that!” Paul says. “A practice that may be fit for purpose is to deliver equity through a vesting milestone approach. This is not very popular with Proxy Advisors and by extension investors but a 25% vest after 1 year and monthly or quarterly vesting over a further 2 years would be extremely popular. Realistically executives would most likely be tied to longer vesting schedules but below the C-Suite, milestone vesting would reward employees for the work they have and are putting in. The effect is more immediate and that can make a difference in how an employee views their place in an organisation.
“Hard” rewards in the form of cash and equity are important. But a really good reward specialist will also see the value in softer rewards, in recognition and appreciation.
Reward and recognition are not the same thing. While many employers might feel that their monthly salary should be enough, there is a noticeable cultural shift for employees to demand recognition for their efforts, beyond financial rewards. On the spot awards (which might also include cash bonuses), can be given out to recognise the staff members who have really gone above and beyond for the IPO. When people feel appreciated, they are more likely to stay engaged and loyal.
“You often get even more value from recognition than cash rewards,” Paul says, “recognising the personal sacrifices made by staff and workers will go a long way.”
How to get everybody involved in the IPO
During IPO, reward is frequently only directed towards executive level staff, but this is a mistake. All employees should get to celebrate that this exciting event is happening. Junior members of staff should get to “touch” the IPO in the form of shares.
Indeed, this is often an expectation of staff, and when it isn’t met, is when you start losing people.
You could offer a 2 for 1 scheme, where staff members can buy one share and get one free, for example. By encouraging staff to make an investment in the company, they effectively become owners rather than simply employees. This helps people feel involved, engaged, and improves productivity and loyalty during and beyond the IPO process.
“You have to get the whole company involved, ask the staff what their thoughts are and get people participating.”
Strong communication throughout the whole process, and at all levels, is key. Answer all the FAQs, because when people feel that they aren’t included, the situation can quickly become toxic, which can spread throughout the company and halt an IPO in its tracks.
As we have shown, having a reward leader to head up decisions around IPO rewards can be highly valuable.
Your reward leader can advise on compliance, to ensure that you don’t step out of line, but also help your reward line up with expectations from both investors and employees.
Without a reward professional, you will likely not know your options, and therefore won’t offer the right things at the right time. “And then you can have a mass exodus if people don’t have their expectations met.” Paul said.
Finding a good reward leader, who is good at both the hard (financial, cash and equity) and soft (recognition and appreciation) rewards, will make the process easy to understand, and ensure that staff feel appreciated and valued. Both of which are key elements of a successful IPO.
Thanks so much Paul for sharing these interesting insights!
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