This report is a summary analysis of a joint study by Compensation Advisory Partners, Family Business and Private Company Director magazines.

Summary Report

Compensation Advisory Partners (CAP) and MLR Media launched the first-ever Family Business Executive Compensation Survey in 2020. CAP, an independent executive compensation consulting firm, and MLR Media, the publisher of Family Business Magazine, launched the survey to collect data on the executive compensation levels at family companies and to understand the pay practices unique to these businesses. The survey drew responses from more than 300 family-owned businesses representing a broad range of revenue sizes and industries.

2020 was a particularly robust year for initial public offerings (IPOs) and special purpose acquisition companies (SPACs). Many companies took advantage of favorable capital markets, and we saw much-anticipated IPOs such as Snowflake, DoorDash and Airbnb hit the public markets in 2020. Founders, employees, and investors unlocked significant value in these IPO events.

CAP’s review of technology company equity practices around IPO reveals several emerging compensation trends: a shift in equity award vehicles from stock options to restricted stock units (RSUs), increased use of double-trigger vesting for restricted stock, and large, company-friendly equity authorizations. Additionally, some companies implemented noteworthy founder compensation practices.

Pre-IPO Equity Grant Practices

CAP reviewed a sample of 20 high-profile, technology companies with IPOs in recent years to understand their equity practices leading up to the IPO.

List of companies:

Airbnb Fitbit Palantir Slack Square
Asana GoPro Peloton Snap Uber
DoorDash Grubhub Pinterest Snowflake Unity Software
Dropbox Lyft Roku Sonos Zoom Video

Options are still predominant. For companies anticipating growth, options continue to be the favored equity award for a variety of reasons. For employees, there is no tax burden at vest, and the employee has control over the settlement of the award and associated taxation. If incentive stock options (“ISOs”) are used, the employee receives capital gains treatment upon disposition of shares, assuming the required holding period is met. Options are also favorable from the shareholder (often financial sponsors) perspective. Options align the interests of employees with their shareholders, as no award value is realized unless the company value appreciates. Typically, stock options are granted at-hire and allow employees to share in the value of the company as it grows and matures.

Increased use of RSUs with unique features. Some companies (such as Lyft, Uber, and Dropbox) shifted to granting more RSUs in the years leading up to IPO. In these cases, RSUs have double-trigger vesting, which requires both time-based service (typically four years) and event-based requirements (typically a qualifying capital event such as an IPO) be satisfied in order for the RSUs to vest.

Companies naturally shift from granting options to RSUs as they grow and mature. Reasons for this include changes in a company’s growth expectations post-IPO, the need to conserve shares, and a desire for differentiated equity grant programs as companies grow in size and complexity. However, as seen with recent IPOs, favoring RSUs could be attributed to the fact that award values are easier to understand and are somewhat protected, even if company valuations fluctuate between funding rounds. Companies also benefit, from an accounting perspective, with vesting being dependent on a qualifying capital event as no accounting charge is incurred until such event takes place.

Adopting double-trigger RSUs has potential downsides, though. These include mounting pressure to go public (as evidenced by media coverage of the long-delayed IPO of Airbnb), and a significant tax burden for employees whose equity vests upon IPO. Employees are exposed to the financial risk of being taxed on stock compensation that has since declined in value since IPO. Also, when employees leave the company before the IPO event, their unvested shares are forfeited. This may pose an issue for recruitment unless the IPO timeline is clear. For the company, event-based vesting triggers a major accounting expense, and the large number of shares being sold may temporarily impact the company’s share price.

Options Only15%Mix of Options and FullValue Shares85%Prevalence of Equity Types Used Prior to IPO

Note: No companies in the sample granted only full value shares prior to IPO.

Equity Authorization Pre- and At-IPO Practices

Before going public, companies often need to adopt multiple equity plans for incentive purposes. Not surprisingly, long time horizons and numerous funding rounds before IPO require companies to authorize additional equity share pools for compensation purposes. Private company investors are asked to approve incentives so that the company has enough “dry powder” to scale the executive team and grow its employee base. At median, equity overhang1 pre-IPO is 21.5% among the sample group.

In conjunction with the IPO, most companies (95% of companies in the sample), asked for an additional equity authorization. Median at-IPO overhang is 27.7% of common shares outstanding (CSO). In addition to the share request, companies often seek annual evergreen provisions (typically 5% of CSO per year) and liberal share recycling provisions.

21.5%27.7%11.7%0.0%5.0%10.0%15.0%20.0%25.0%30.0%Pre-IPOAt-IPOMature CompaniesMedian Equity Overhang

Note: Pre-IPO and At-IPO equity overhang reflects the sample of 20 companies. Equity overhang for mature companies2 reflects sample (n=195) of S&P 1500 companies in the Information Technology sector, excluding companies that have gone public in the past three years.

Employee Stock Purchase Plans (ESPPs)

Many of the technology companies that went public implemented ESPPs in conjunction with their IPOs. ESPPs enable employees to purchase company stock, often at a discount, through payroll deductions. Most ESPPs are designed to be qualified plans under Internal Revenue Code Section 423, and from the standpoint of proxy advisory firms, such as ISS and Glass Lewis, are considered non-controversial. ESPPs are an appealing way for all employees to voluntarily acquire company shares after the IPO event. This is especially important as companies shift from granting equity to all employees to granting equity on a more selective basis (e.g., senior manager and up). An ESPP is an employee benefit that can be structured in ways (such as rollover provisions or extended offering periods) that make it an attractive recruiting and retention tool.

Founder Compensation

Every company has a different growth trajectory in its early years after formation. Founders typically must dilute personal ownership of the company in order to raise necessary capital. Companies in our study typically had multiple founders; however, not all founders contribute in the same way as the company evolves. Founders are often uniquely positioned and are key assets to their companies, which makes their retention crucial especially since finding a suitable replacement may be both difficult and expensive.

Founders who remain in executive roles after IPO have varied compensation packages depending on the specific circumstances. In some cases (Snap and Airbnb) founders reduced their base salaries to $1 post-IPO in exchange for significant equity grants in conjunction with the IPO. This is not typical as most founders maintain cash compensation (base salary and target bonuses) at market competitive levels.

With respect to equity compensation, some companies (including Airbnb and DoorDash) provided significant equity grants at or just prior to IPO. These grants often vest based on the achievement of performance criteria (e.g., stock price or market capitalization goals) and have long vesting periods that correspond with the magnitude of the award. Companies view these additional, often significant, equity grants to founders as necessary to incent continued service and focus, to maintain alignment with stockholder interests, and to mitigate the dilutive effects of public offerings on founder equity stakes.

Conclusion

Despite no “one-size-fits-all” approach to compensation, it is important to understand the various equity compensation tools available for companies preparing for an initial public offering. CAP’s review of recent technology IPOs highlights the latest trends in equity compensation needed to attract and retain skilled talent. Equally important is proactively and frequently communicating the value and mechanics of equity to participants for these awards to have maximum impact. Aligning pay philosophy with company culture and shareholder interests are important guiding principles to consider as companies design their equity incentive practices around IPO.


1 Overhang for IPO companies: Numerator = [Outstanding full value shares & options + shares available for grant + additional share requests] / Denominator = [Numerator + common shares outstanding as per the record date of the S-1 filing]

2 Overhang for Mature Companies: Numerator = [Outstanding full value shares & options + shares available for grant + additional share requests] / Denominator = [Diluted weighted average shares outstanding]

More than six months have passed since the COVID-19 pandemic began. In February, American businesses were hit hard by shutdowns, shifting demand, operational disruptions, and significant new challenges for employee health and safety. Many S&P Composite 1500 companies responded with changes to their compensation programs for executives and employees. Initial pay actions in March, April and May focused on conserving cash, mainly through salary cuts. Over the summer, companies adapted, and pay actions began to focus on annual and long-term incentive plans.

Public filings in September and October offered the first detailed look at how U.S. public companies adjusted their executive compensation plans in response to COVID-19. Public companies with fiscal year ends (FYEs) on or near June 30 recently filed their proxy statements, which included robust discussions of the impact of COVID-19 on 2020 executive compensation decisions and plans for 2021. Of the S&P Composite 1500 companies – which Compensation Advisory Partners (CAP) has been closely tracking – 65 companies with FYEs between May 30 and July 3 filed their annual proxy statements by October 7. Of the 65 companies, 28 – or 43 percent – announced changes to their outstanding and go-forward incentive plans because of COVID-19. Approximately 60 percent of the 28 companies had responded at the start of the pandemic with immediate human capital actions, including temporary reductions to executive base salaries, and adverse broad-based employee actions.

It is too early to say whether actions taken by the June FYE companies are indicative of trends we will see when most companies file their proxy statements in the spring of 2021. From an industry-sector standpoint, the June FYE companies show significant representation from Information Technology (28%), Industrials (15%), and Consumer Staples (15%). While not a completely representative sample, this group of companies still provides an interesting early look at executive compensation responses to COVID-19 beyond annual pay reductions.

The majority of the 28 companies that reported COVID-19-related pay actions adjusted both their annual and long-term incentive plans. About 85 percent of the companies made changes to their annual incentive plans, and 75 percent made changes to long-term incentives. Twenty-two of the companies took more than one incentive action.

Annual Only(n=7)25%Both(n=17)61%Long-term Only(n=4)14%Annual and Long-Term Incentive Actions in Response to COVID-19 (n=28)Number of Incentive Actions per Company2261

Annual Incentives

Of the 28 companies, 24 made changes to their outstanding and/or go-forward annual incentive plans. The most common changes were modifying the performance period, exercising discretion to determine award amounts, revising the payout scale, delaying goal-setting and adding or changing performance metrics.

973111423642139665211Revised Outstanding PlanRevised Go-Forward PlanDeferred PayoutReset GoalsCanceled PlanAdded / Changed Metric(s)Delayed Goal-SettingRevised Payout ScaleAdjusted Performance PeriodAnnual Incentive Plan Changes in Response to COVID-19

Prevalent annual incentive actions are discussed below.

Adjusted Performance Period

Several June FYE companies adjusted the performance period for an outstanding plan. For these companies, COVID-19 only impacted fourth-quarter results, so most of their 2020 fiscal years were business as usual. In go-forward plans, shorter performance periods are intended to focus executives and employees on immediate priorities, and to recognize that goal-setting will be difficult because of COVID-19.

Action

# of Companies

Outstanding Plan

Shortened the performance period to exclude the pandemic.

9

Go-Forward Plan

Bifurcated annual performance periods.

2

Set quarterly goals.

2

Use of Discretion

Eight companies applied discretion to outstanding incentive awards. The disclosed rationale for the use of upward discretion was to recognize the extraordinary efforts of executives and employees who contributed to companies’ COVID-19 responses, and to recognize performance before COVID-19 hit.

Action

# of Companies

Outstanding Plan

Applied discretion to increase annual incentive funding and awards.

7

Used downward discretion to reflect the negative impact of COVID-19.

1

Revised Payout Scale

Revisions to payout scales for outstanding awards were made primarily to prorate awards in conjunction with adjusted performance periods, as discussed in “Adjusted Performance Period.” Payout scales were revised in go-forward plans for a number of reasons: to widen the performance curve to reflect the difficulty with goal-setting, to reduce maximum payouts for cost containment, and to implement a payout floor and increase the award maximums to incentivize superior performance.

Action

# of Companies

Outstanding Plan

Revised payout scales in conjunction with shortening performance periods to remove the impact of COVID-19. The payouts were prorated based on how much the performance periods were shortened.

3

Go-Forward Plan

Widened performance curves.

1

Reduced maximum annual incentive award to be 150 percent of target, down from 200 percent of target.

1

Added a payout floor, increased maximum payout, and adjusted corporate and business unit award multipliers.

1

Delayed Goal-Setting

Six companies delayed goal-setting for go-forward plans. The rationale is to allow time for more information to predict financial performance.

Action

# of Companies

Go-Forward Plan

Delayed goal-setting in conjunction with breaking performance periods into smaller units.

3

Delayed goal-setting to have more accurate information for forecasting.

3

Added/Changed Metrics

Several June FYE companies changed performance metrics for their annual incentive plans to move away from financial measures. The shift to operational measures illustrates that companies are opting to focus executives and employees on drivers of financial performance, which may provide clearer line of sight or may be easier to forecast in unpredictable times. Similarly, the shift to strategic and individual metrics may allow for more discretion in payout determination and recognizes the importance of non-financial goals at this time.

Action

# of Companies

Outstanding Plan

Changed metrics for outstanding awards to focus on near-term priorities, and company health and well-being.

1

Go-Forward Plan

Adjusted annual performance metrics, including shifting to operational, strategic, and individual performance.

4

Long-Term Incentives

Of the 28 companies, 21 made changes to their outstanding and/or go-forward long-term incentive plans. All but four of the companies that adjusted long-term incentives also adjusted annual incentive plans. The most common changes were modifying the performance period, revising the payout scale, changing the long-term incentive vehicle mix, changing metrics for performance awards, and delaying goal-setting.

76W55105512111055Delayed Goal-SettingChanged Performance MetricsChanged LTI Vehicles Revised Payout ScaleAdjusted Performance PeriodRevised Outstanding PlanRevised Go-Forward PlanLong-Term Incentive (LTI) Plan Changes in Response to COVID-19

Modified the Performance Period

As with annual incentive plans, modifying the performance period was the most prevalent long-term incentive plan change. CAP predicts goal-setting will remain as a key challenge for incentive plan design for 2021 and beyond. The COVID-19 pandemic hurt many companies and helped others (e.g., consumer staples), resulting in highly unusual results for 2020. To address future uncertainty during goal-setting, breaking performance periods into smaller periods may become more common until economic conditions stabilize.

Action

# of Companies

Outstanding Plan

Modified the performance period for outstanding awards, including omitting the quarter negatively impacted by COVID-19. With that change, some companies also prorated the award amounts commensurately.

7

Go-Forward Plan

Divided the award period into shorter periods for purposes of goal-setting and award calculation.

3

Shortened the three-year performance period to two years.

1

Changed the goal-setting approach to include a cumulative goal.

1

Revised the Payout Scale

Revisions to past payout opportunities and maximums were made to prorate awards in conjunction with shortened performance periods, or to cap the payout and conserve cash.

Action

# of Companies

Outstanding Plan

Decreased the payout scale for outstanding awards in conjunction with omitting quarters negatively impacted by COVID-19. Prorated the awards commensurately (e.g., if performance were measured over 11 quarters instead of 12, the award would be prorated by 11/12).

4

Revised award payouts to the maximum based on performance in quarters not negatively impacted by COVID-19.

1

Capped the maximum payout at target.

1

Go-Forward Plan

Awarded grants at target regardless of performance.

1

Increased maximum payout.

1

Changed Long-Term Incentive Vehicles

Ten companies adjusted the long-term incentive mix for upcoming awards. The most common change was to add time-vested vehicles or to increase the percentage of time-vested vehicles overall to increase retention and recognize the difficulties of goal-setting during the pandemic.

Action

# of Companies

Go-Forward Plan

Added time-vesting vehicles or increased the percentage of time-vested vehicles in the overall mix.

6

Added stock options to the 2021 fiscal year grant.

2

Eliminated stock options.

2

Not granting equity.

2

Note: Two companies took multiple actions.

Changed Performance Plan Metrics

Given the impact of COVID-19 on U.S. companies, changing performance measures to reflect new business realities has not been a surprising development. Five companies with June FYEs adjusted their long-term performance measures. CAP expects to see more changes in performance measures in go-forward performance plans as companies file proxy statements.

Action

# of Companies

Go-Forward Plan

Adopted relative performance measures, which mitigate the risk of goals being missed because of market events beyond management’s control.

2

Added strategic metrics to focus management on COVID-related priorities.

2

Eliminated a more complicated return measure to focus on revenue and profitability.

1

Delayed Goal-Setting

Five companies delayed goal-setting for future awards. Delaying annual grants or choosing to set targets in the second quarter could provide companies with flexibility to set more accurate and realistic performance goals.

Action

# of Companies

Go-Forward Plan

Made annual grants but delaying goal-setting under the grants until there is more predictability surrounding COVID-19 and its impact.

3

Delayed making annual grants.

2

Special Awards

Four companies with June FYEs provided special awards to executives. FedEx and Nike made special awards to replace annual and long-term incentive awards that were not paid because of COVID-19. Tapestry and Herman Miller provided special grants to incentivize executive performance. CAP expects to see more special awards in the future.

Company

Revenue ($M)

Position

Grant Date

Award Value ($000s)

Award Type*

Vesting

FedEx Corporation

$71,490

CEO

06/15/2020

$14,160

SOs

Ratable 4-year

COO

$3,981

NIKE, Inc.

$37,337

CEO

06/01/2020

$6,750

Cash

Immediate

Other NEOs

$2,533 (avg.)

Tapestry, Inc.

$4,961

All NEOs

08/17/2020

$200 – $500

PSUs

Cliff 2-year

Herman Miller

$2,487

Leadership, including NEOs

07/14/2020

Not disclosed

Premium SOs

Ratable 3-year

* SOs are stock options; PSUs are performance share units.

Looking Ahead

CAP expects companies to make increasingly more changes to their executive compensation programs to address the impact of COVID-19, market volatility and the challenges of credible long-term forecasting.

Annual Incentive Plans

  • Use of informed or structured discretion to determine payouts.
  • New or increased weighting on operational, strategic, and individual performance metrics. These may be incorporated as environmental, social and governance (ESG) metrics, which provide a more holistic view of business performance and consider different stakeholders.
  • Use of wider performance scales around target goals, which may lead to less volatility in payouts.
  • Delay of goal-setting to improve accuracy.
  • Use of shorter performance periods to address goal-setting difficulties.

Long-Term Incentive Plans

  • Increased use of time-based restricted stock/units for retention. CAP still expects at least 50% of long-term incentives to be performance-based, given the long-standing expectations of proxy advisors and major investors.
    • Companies may exclude the chief executive officer or named executive officers from the shift to time-based equity.
  • Use of relative performance measures (primarily total shareholder return), or an increase in the weight of relative measures.
  • Delay of goal-setting to improve accuracy.
  • Use of shorter periods for performance-based long-term incentives to lower the risk of the overall incentive program.

Bertha Masuda and Bonnie Schindler discussing the use of ESG metrics in private companies.

Compensation Advisory Partners (CAP) assessed human capital actions taken by companies in the Consumer Staples sector in response to the COVID-19 pandemic. Key findings include:

  • The Consumer Staples sector was moderately impacted by the COVID-19 pandemic, with 36% of companies in the S&P 1500 taking human capital actions.
  • Food and Staples Retailing companies reported the most actions – many of which were positive for employees: expanded paid time off and health care benefits, one-time bonuses and additional pay for on-site workers, and workforce expansions
  • The five most prevalent human capital actions by the Consumer Staples sector are additional payments for on-site employees (non-executives), expanded benefits programs, one-time bonuses for non-executives, furloughs of employees, and workforce expansions.
  • Only a handful of companies in the sector reported executive salary reductions:
    • Median salary reductions were 28% for CEOs and 25% for other executives.
    • For boards of directors, pay was cut by a median of 50%.

The PDF of the report provides additional data for the Consumer Staples sector.
The human capital actions that CAP is tracking include pay cuts; changes to annual and long-term incentives; furloughs; workforce reductions; suspended 401K matches; enhanced health and welfare benefits; additional pay for frontline workers; pay continuity; and workforce expansions. CAP will continue to monitor corporate public announcements of COVID-19 actions.

Compensation Advisory Partners (CAP) assessed human capital actions taken by companies in the Real Estate sector in response to the COVID-19 pandemic. Key findings include:

  • The Real Estate sector was nominally impacted by the COVID-19 pandemic.
    • 24% of the Real Estate companies in the S&P Composite 1500 Index reported human capital actions in response to the pandemic. In contrast, 41 percent of companies in the S&P 1500 reported actions.
  • Pay reductions for executives and board members are the most prevalent human capital actions in the Real Estate sector.
    • Median salary reductions were 50 percent for chief executive officers (CEOs), while median salary reductions for other executives were 21 percent.
    • For boards of directors, pay was cut by a median of 33 percent.
  • In addition to pay reductions for executives and boards, the most prevalent human capital actions in the Real Estate sector were furloughs, workforce reductions and employee pay reductions.

The PDF of the report provides additional data for the Real Estate sector.

The human capital actions that CAP is tracking include pay cuts; changes to annual and long-term incentives; furloughs; workforce reductions; suspended 401K matches; enhanced health and welfare benefits; additional pay for frontline workers; pay continuity; and workforce expansions. CAP will continue to monitor corporate public announcements of COVID-19 actions.

Compensation Advisory Partners (CAP) assessed human capital actions taken by companies in the Information Technology sector in response to the COVID-19 pandemic. Key findings include:

  • The Information Technology (IT) sector and its Software & Services, Technology Hardware & Equipment, and Semiconductors and Semiconductor Equipment industries were nominally impacted by the COVID-19 pandemic.
    • 28% of the Information Technology companies in the S&P Composite 1500 Index reported human capital actions in response to the pandemic. In contrast, 41 percent of companies in the S&P 1500 reported actions.
    • Of the industries in the Information Technology sector, Software and Services (33%) and Technology Hardware and Equipment (32%) were impacted similarly, with about a third of companies reporting actions. In the Semiconductors and Semiconductor Equipment industry, only 15% of companies reported actions.
  • Pay reductions for executives and board members are the most prevalent human capital actions in the Information Technology sector.
    • Median salary reductions were 30 percent for chief executive officers (CEOs), while median salary reductions for other executives were 20 percent.
    • For boards of directors, pay was cut by a median of 28 percent. The range of board pay cuts approximates the range for CEO pay cuts.
  • In addition to pay reductions for executives and boards, the most prevalent human capital actions in the Information Technology sector were furloughs, employee pay cuts, and workforce reductions.

The PDF of the report provides additional data for the Information Technology sector.

The human capital actions that CAP is tracking include pay cuts; changes to annual and long-term incentives; furloughs; workforce reductions; suspended 401K matches; enhanced health and welfare benefits; additional pay for frontline workers; pay continuity; and workforce expansions. CAP will continue to monitor corporate public announcements of COVID-19 actions.