CAP analyzed executive compensation practices at companies with recent IPOs from 2023 to 2025. The data shows a clear public company transition: cash generally increases, formal bonus programs become more prevalent, and equity grants become a larger part of the compensation mix. This report also examines equity share pool design, including pool size and value, other equity practices and the typical allocation to senior executives. Majority of IPOs tend to cluster in a couple of industries. CAP’s study is cross-industry, though approximately 80% of the sample represents the technology or biotechnology/pharmaceutical industries (45% and 36% respectively).

At a Glance

An IPO changes more than just a company’s ownership and capital structure. It also introduces public company governance and shareholder expectations that affect both pay levels and program design. CAP’s review shows that the transition from pre-IPO to post-IPO is visible in the changes to cash compensation, equity mix, formalization of incentive programs, and the equity pool design that supports ongoing compensation programs.

• Pay levels rise. Median base salary for CEOs increases 5% and median CFO salary rises 7%, while long-term incentives triple in value
• Formal annual incentive (or bonus) programs become more prevalent
• Pay mix shifts increasingly toward equity and long-term incentives, increasing to about 50% of mix, from about 35% pre-IPO, on average
• Share pools are a major component of compensation-related IPO planning. The median pool is about 15 million shares; 89% of new plans include an evergreen provision
• 77% of companies implemented an Employee Stock Purchase Plan (ESPP) at time of IPO

How Pay Levels Change after an IPO

The move to public company compensation is accompanied by higher pay, but the magnitude for each element differs across industries.

Base Salary

CEO and CFO base salary increases for the total sample were similar in the mid- to high-single digits. For CEOs, median increase is 5% post-IPO; for CFOs, the median is 7%. Among constant incumbents in the technology sector, at median, base salaries were flat.

Annual Incentive Opportunity

Median bonus opportunity for CEOs nearly doubles post-IPO, while CFOs see a more modest increase in target bonus as a percent of salary. Technology executives tend to have higher opportunities than their counterparts in biotechnology/pharmaceuticals.

Long-Term Incentive Opportunity

For CEOs, the median actual long-term incentive values increase by 262% from pre-IPO levels; for CFOs, median increases by slightly less but is still significant (+230%). As public company compensation plans are formalized, long-term incentive values become the largest portion of executive pay as the cost to companies of providing long-term incentives goes down given access to equity.

Total Direct Compensation

Overall, when looking at total direct compensation, CEO and CFO compensation significantly increases from pre-IPO levels.

Annual Incentive Programs Become More Defined

Pre-IPO annual incentive (or bonus) programs are often highly discretionary. They may consider financial performance but often do not have formal metrics or weightings and may be largely determined based on individual performance. As companies evolve towards and through an IPO, we see companies begin to formalize the bonus program. Investor expectations are that bonus programs are tied to financial performance with clear target goals. The first step to formalizing a bonus program is ensuring that participants have individual targets. From there, depending on the ability to forecast and set goals, companies typically start with selecting key financial performance metrics and ultimately evolve to a clearly defined program with threshold, target, and maximum financial goals. About a third of companies in our sample did not have a formal annual incentive program pre-IPO and formalized it in the year after going public.

Corporate performance remains the foundation of formal short-term incentive programs. Post-IPO, all companies in our sample had a corporate component, with about half of them also incorporating individual performance.

Pay Mix Shifts Toward Long-Term Incentives (Equity)

The public company transition changes not only how much executives are paid but also how compensation is delivered. Across the total sample, long-term incentives become a larger portion of actual pay after IPO.

The long-term incentive vehicles used varies across companies. Most recent IPO companies use time-based vehicles, either stock options or time-based restricted stock/stock units (RS/RSUs). This also aligns with the most common vehicles used pre-IPO. As companies continue to evolve into more mature public companies, the expectation from institutional investors and proxy advisors is that a performance-based vehicle is introduced into the mix, balanced with time-based vehicles. Our sample saw limited instances of a performance-based vehicle right after IPO, but that prevalence increases as companies move further away from IPO.

Founder-Led Status Impacts Compensation

About 70% of companies in CAP’s sample were led by founders at the time of IPO. Founder ownership levels remained relatively steady pre- and post-IPO, with technology CEOs holding about 30% of outstanding equity. For other industries, ownership is around 10%. Boards and Compensation Committees need to determine philosophically if higher ownership levels should be considered when setting pay. One approach is to minimize equity grants given high existing ownership and alignment with shareholders, while another approach is to set market-competitive pay irrespective of ownership level. We often see mix of pay differ between founders and non-founders, even when total compensation levels on a dollar-basis are similar.

Founder-led companies can have unconventional pay mixes, including exceptionally low annual equity compensation or unusually high concentrations in one pay element. Overall, founder CEOs tend to have a slightly heavier weighting on cash compensation than non-founders, though for both groups, we see about 50% in the long-term incentives on a go-forward basis in our sample.

Share Pool Size and Equity Plan Design is One of the Biggest Decision Points

Long-term incentive plan design is one of the biggest compensation decisions made during the IPO process. The size of the equity pool (and related plan features) determines the ability to make initial transition-related grants, support ongoing annual equity programs, and recruit future talent.

The initial share pool, at median, for our sample was around 15 million shares, with median total potential dilution of around 15%. Size of the pool can vary across industries – we see higher initial pools in technology where equity can be an important compensation tool organization-wide, with slightly smaller pools in the biotechnology/pharmaceutical industry. Regardless of the absolute number of shares, we typically see dilution in the range of 10% – 15%+, with more mature companies having lower dilution and earlier-stage companies that rely more heavily on equity as a compensation tool to have dilution ranging up to 20%.

As the first long-term incentive plan is drafted at the time of IPO and therefore is not shareholder approved, we often see less shareholder friendly practices including evergreen provisions and liberal share recycling. It is also common to implement an employee stock purchase plan (ESPP) at the time of IPO.

Once a company goes public, any material changes to the equity plan document, including increasing the total pool, are required to be shareholder approved. Evergreen provisions automatically increase the size of the equity pool each year. The typical evergreen provision is around 5% per year, though boards typically retain the discretion to reduce this amount. Sometimes companies use a “lesser of” approach that considers a fixed absolute number of shares versus a fixed percentage to increase the pool by.

Liberal share recycling is another common pre-public practice that helps conserve the number of shares. While all plans permit returning shares to the pool upon forfeit, liberal share recycling can be when shares withheld for taxes or tendered at an option exercise are returned to the pool. This can lead to further dilution of shareholders without them being aware. We typically see these two provisions removed when a company puts their equity plan up for shareholder approval the first time.

An employee stock purchase plan, or ESPP, allows employees to purchase shares through payroll, often at a discount to the current stock price. This practice supports retention and engagement and broadens equity participation for employees that may not be in the annual equity program.

We often see companies grant initial equity awards to executives right before or in conjunction with the IPO. These awards are often larger than typical annual equity awards and designed to retain executives through the newly public company period. Median CEO grant is around 4% of the total pool, though higher for technology companies and slightly lower for biotechnology/pharmaceutical companies. For CFOs, this is around 1% – 1.5% of the total pool. These awards often can use a large portion of the initial share pool. In our sample, we had few examples of special awards, and those tended to be for other executives given the high prevalence of founders in our sample.

Top Considerations for Companies Preparing to Go Public

Executive compensation when going public is shaped by two primary forces: 1) the additional responsibility and oversight inherent in leading a public company and 2) external expectations from proxy advisors and institutional investors regarding compensation program design. There is an understanding that the transition and evolution of the executive compensation program happens over time, though the time period for this varies based on your investor base. There are several considerations during the transition:

• Establish a core compensation program: Develop a peer group, set executive pay aligned to public company peer group, formalize annual incentive program and determine long-term incentive program
• Make decisions that set the company up for success over a multi-year period: Establish framework for continued evolution and progression toward public company pay and governance, determine size of equity pool needed to support multiple years of grants, and determine how compensation tools such as equity are used throughout the organization
• Assess post-IPO ownership and understand your investor base: If founders still retain significant ownership or there is a controlling shareholder, companies may feel less pressure than other newly public companies to ramp up governance expectations such as stock ownership guidelines or adding a performance-based long-term incentive plan
• Understand your filing status and how that impacts compensation disclosures: The SEC has a proposal outstanding that will greatly simplify disclosure requirements for newly public companies; however, it is not just about a CD&A, there are currently other requirements such as say-on-pay, CEO pay ratio and pay versus performance disclosure. It is important to understand when you will become subject to these, and the phase-in period so that you are prepared come proxy season and are not scrambling
• Understand how decision-making impacts disclosure: It is not just special awards, any and all parts of the decision-making process (setting targets, determining bonus outcomes, etc.) will need to be disclosed. Make sure your board understands disclosure implications of decisions going forward.

Going public is an exciting time for companies, but there are a lot of implications for executive compensation. Beginning to think about the necessary changes 12-18 months ahead of going public will make the transition significantly easier, rather than trying to take care of compensation as an afterthought.

For questions or more information, please contact:

Joanna Czyzewski
Partner
[email protected]
646-486-9746

Chris Callegari
Senior Associate
[email protected]
646-486-9747

Bhavika Podduturi provided research assistance for this report.

Research Sample

CAP’s analysis covers 44 companies across industries. See below for financial statistics.

For the next installment of our technology industry research, Compensation Advisory Partners (CAP) reviewed long-term incentive relative total shareholder return (“rTSR”) metric design practices across 52 companies in the Technology industry as well as general industry (the Nasdaq 100 index for purposes of this research). The technology companies are split into three groups by revenue size: $500 million to $2 billion (“Small”), $2 billion to $5 billion (“Medium”), and over $5 billion (“Large”).

This report reviews key design practices and considerations of using relative TSR in long-term incentive plans. Relative TSR is a widely used metric in long-term incentive plans as it aligns executives to the shareholder experience and avoids the challenges of setting internal performance targets. In our review, we found that 46% of the technology companies use rTSR while 52% in the broader sample of Nasdaq 100 companies use the metric in their long-term incentive plan. CAP’s design considerations are intended to inform of best practices in technology companies around use of rTSR in long-term incentive programs.

Design Consideration: rTSR as Metric or Modifier

Twenty-four of the 52 technology companies in our study use rTSR in their long-term incentive plans (i.e. 46%). Of those, 17 companies (71%) use it as a weighted performance metric, and 7 companies (29%) use it as a payout modifier. Larger companies overall are more likely to use rTSR as a modifier, while medium and smaller companies in the technology sample more commonly use rTSR as a weighted metric.

Companies most often balance the use of rTSR with other financial metrics, depending on company strategy and long-term priorities. Pairing rTSR with financial metrics can mitigate the impact of volatile markets, provide more balance and reward executives for meeting operational goals. When rTSR is used in the performance plan as a weighted metric along with other metrics, the average weighting is 50% of the award. A quarter of the technology companies using rTSR as a weighted metric use it as the sole metric in the performance plan. Using rTSR as a weighted metric creates greater alignment between executive pay and shareholder outcomes.

Award modifiers (versus weighted measures) can add complexity yet are effective at promoting alignment between executives and shareholders while still prioritizing operational performance as the rTSR impact is smaller. A criticism of rTSR is that it is an outcome measure, versus one that drives performance, but market and operational performance may not always be aligned so using it as a modifier can help provide balance. At median of both the technology company sample and Nasdaq 100 companies, the modifier can adjust payouts by ±25%.

Design Consideration: TSR Comparator Groups

The choice of a comparator group sets the context for how rTSR performance will be evaluated. There are four typical options as discussed below.

Among the 24 technology companies using rTSR, 75% use a general industry index, 21% use a technology-specific index, and 4% use a custom performance peer group. Common indices used in the technology sample include the Russell 3000, S&P 500, Nasdaq Composite and Nasdaq 100. In comparison, of the 52 companies in the Nasdaq 100 using rTSR in their long-term performance plans, 52% use a general index, 17% use an industry index, 19% use a custom performance peer group, and 12% use their compensation benchmarking peer group. More technology companies may use a general industry index given that: (1) industry indices may include companies that are largely different (i.e., hardware versus software), and (2) for smaller companies, there may be limited choices of industry indices that are reflective of similar stage companies.

Regardless of the comparator group selected, the comparators/constituents are locked at the start of the performance period. As a result, an approach should be determined in advance to address companies that are acquired, go bankrupt, or are otherwise unable to be included for the full performance period. These provisions should be defined up front in the award agreement to avoid any uncertainty.

Design Consideration: Performance Goals and Payout Scales

Another key design feature includes performance goals and corresponding payout leverage. Among technology companies using rTSR, at median, the payout scale ranges from 50% of target at threshold to 200% of target at maximum, with target performance goals most commonly set at median performance (50th percentile) relative to comparator companies. About a third of the technology companies using rTSR target above-median performance for a target payout, which is a fairly progressive design feature. Proxy advisory firms have criticized median performance that results in a target (or, 100%) payout, despite this being most common practice in both our technology sample and the broader market. Many companies remain comfortable with this approach given that there are items outside of an executive’s control impacting stock price and returns.

The structure at technology companies is generally aligned with the broader market. The Nasdaq 100, at median, sets payout curve ranges from 30% of target at threshold to 200% at maximum, with similar prevalence of target goals set at and above median performance.

Most companies set goals that target a relative percentile positioning within the comparator group. A less common approach (2 of the 24 technology companies) is to compare company returns to total index returns. This approach can lead to unexpected outcomes given that most indices are weighted by market capitalization and index performance can be driven by a select group of companies. It can also be difficult to determine the number of percentage points of outperformance (or underperformance) that results in maximum (or threshold) payout.

Performance goal ranges are generally consistent across small, medium, and large revenue groups, though larger companies more commonly set target performance goals above the 50th percentile. It is common for maximum performance goals to be set above the 75th percentile in the technology industry. In the technology sample, 67% of companies set maximum performance goals above the 75th percentile, and 33% set max goals at the 75th percentile, compared to 50% of Nasdaq 100 companies that set maximum performance goals above the 75th percentile and 50% that that set max goals at the 75th percentile. Threshold performance is typically set at the 25th percentile.

All 24 technology companies measure rTSR performance over at least three years, with 75% using a three-year cumulative period. Many companies, mix and match the length of the performance period used for rTSR and accompanying financial performance metrics, and often use a shorter performance period (i.e., less than three years) for financial measures. Of the 18 technology companies pairing rTSR with financial metrics, 28% measure financial performance over the same three-year period; 44% of companies use three one-year periods. The remaining 28% use a one-year period in conjunction with a three-year rTSR performance period.

The use of mixed performance periods reflects the challenging nature of financial goal setting in a high-growth and/or volatile macroeconomic environment. While relative performance measures like rTSR should account for external risk factors affecting the industry or broader market, long-term absolute financial results can be impacted by factors not predicted at the time of goal-setting which are beyond executives’ control.

Additional Considerations

TSR Calculation Methodology

When setting performance goals, it is important to clearly define the methodology for calculating TSR. It has become exceedingly common to use an average stock price for both the beginning and end of the performance period versus using spot prices. The most common averaging period among technology companies in the sample is 30 trading days (preceding the beginning and end dates of the performance period). Average prices can reduce irregular outcomes caused by stock price volatility on one specific date for both the company and the comparator companies.

When implementing or making changes to rTSR in the plan, historical back testing can also be helpful. This can help with selection of comparator companies as well as determining the appropriate trailing period for calculating TSR. It is important to ensure that outcomes are varied over time and that design features are not always advantageous (or disadvantageous) based on program choices.

Accounting Treatment and Number of Shares Granted

Given the accounting rules for market-based performance awards, grant date fair values for awards with an rTSR component may not align with intended target value. Market-based awards require a Monte Carlo valuation to determine fair value so the reported value of rTSR awards in the Summary Compensation Table and Grants of Plan Based Awards Table will be different (oftentimes higher) than a time-based award or performance-based award without market conditions. This can have communication implications when reported values of equity awards are misaligned from the intended target value. This happens when the spot price (or trailing average trading price) is used to determine the number of shares at grant.

When companies determine the number of shares using the Monte Carlo valuation, executives may view this as punitive since they typically receive less shares than if a spot price (or average price) is used. Monte Carlo valuations often result in a premium price compared to the spot price on date of grant. Using the Monte Carlo Value to determine the number of shares is generally less common, particularly if there are financial metrics included in the long-term incentive plan.

Award Caps

An additional feature included in performance plans using rTSR, is an award cap. Award caps are used to prevent above-target payouts if absolute TSR is negative, (e.g., payout is capped at 100% if absolute stock price decreases during the period). This prevents outsized payouts when shareholders are experiencing negative returns, even if the company overall is performing better than the comparator group. For companies using rTSR, 38% of the technology sample and 50% of the Nasdaq 100 companies cap payouts at target for absolute stock price decline. This feature is viewed as a good governance practice and is well received by shareholders and proxy advisory firms.

Conclusion

Relative TSR is generally considered to be a clear and easy to understand metric in long-term incentive plans. It is a simple way to provide balance and include both relative and absolute performance considerations. While often used at larger established companies, our study shows that technology companies, even with a smaller market cap, use rTSR given the challenges of setting long-term financial performance goals. Used effectively, relative TSR can enhance program design, particularly when balanced with other performance metrics and/or long-term incentive vehicles.

As artificial intelligence continues to reshape industries and redefine how companies operate, organizations are under increasing pressure to build leadership and governance structures that can keep pace. In response, a growing number of S&P 500 companies are elevating AI to the executive level through formal leadership roles, while others are embedding oversight responsibilities into existing C-suite functions and board committees. This evolving landscape reflects not only the strategic importance of AI but also the complexity of managing its opportunities and risks across the enterprise.

At the same time, these developments are raising important questions about compensation, from how to attract specialized AI talent to how companies recognize new responsibilities taken on by existing leaders and directors. In the sections that follow, we examine how companies are structuring AI leadership and oversight today, and what this means for executive and board compensation in the years ahead.

Leadership Roles and Oversight Models

While AI is rapidly becoming a strategic priority across industries, relatively few S&P 500 companies have taken the step of assigning formally titled AI leadership roles. Only 8% have publicly disclosed a senior-level position with a direct AI focus, and just 4% have gone further by establishing a C-suite title that explicitly references artificial intelligence.

These roles — such as Chief AI & Data Officer, SVP of Data, Analytics & AI, and AI Product Manager — are disproportionately concentrated in four industries: Information Technology, Financials, Health Care, and Industrials. This industry concentration reflects both the strategic importance of AI and the degree to which companies are formalizing their AI leadership through role nomenclature. The rise of dedicated AI roles in these fields reflects both a need to scale AI responsibly and a desire to embed AI deeply into core products and operations.

While only a small subset of S&P 500 companies have formal AI-specific executive titles, a larger group discloses that other senior leaders are responsible for overseeing AI initiatives. Specifically, 12% of companies identified at least one non-AI-titled executive with AI oversight duties. These roles span a range of functional areas, reflecting the cross-cutting nature of AI strategy within organizations.

The table below shows the distribution of roles across companies disclosing AI oversight. Unsurprisingly, the most frequently cited position is Chief Technology Officer (46%), highlighting the close alignment between AI initiatives and broader technology leadership. Other common roles vary widely, underscoring how AI responsibilities are being integrated across different strategic functions.

This data highlights that many companies are integrating AI oversight into existing leadership structures, even in the absence of AI-specific titles. It suggests that for some firms, AI is being treated as an extension of core digital, data, or technology functions rather than a standalone domain, at least at this stage of strategic development.

Beyond naming specific executives or titling roles to reflect AI leadership, some companies disclose broader governance structures to oversee their AI initiatives. While these disclosures are less common overall, they highlight the diverse ways organizations are embedding AI oversight across the company.

Roughly 4% of S&P 500 companies disclose board-level involvement in AI oversight, with responsibility most often assigned to the full board. Other companies note involvement by standing committees, including Audit, Nominating & Governance, Technology, Risk, Compensation, or Finance, suggesting that AI governance is beginning to be woven into existing board oversight frameworks rather than being housed in a single, consistent place.

In addition to board-related governance, some companies report cross-functional structures that support or oversee AI activities. About 4% of companies disclose the use of cross-functional teams or groups, signaling a collaborative approach that spans functions like technology, legal, operations, and strategy. A smaller subset (2%) disclose established AI-specific councils or groups, suggesting a more formalized, centralized body focused exclusively on guiding AI strategy, deployment, and risk management.

These structures, whether at the board level, within cross-functional groups, or through AI-focused bodies, demonstrate the varied and still-developing approaches companies are taking to organize and operationalize AI oversight. Together with the role-based governance described earlier, they point to a landscape in which companies are experimenting with different oversight models based on their size, sector, and strategic priorities.

Compensation Implications of AI-Related Leadership and Oversight

As companies expand their leadership and oversight structures to address AI-related opportunities and risks, new implications are emerging for both executive and director compensation. These trends are unfolding across multiple fronts:

First, the recruitment of specialized AI and technology talent, especially individuals with advanced technical credentials or experience leading AI-driven innovation, can carry a significant cost. Much of this talent pool is concentrated within large, well-resourced technology companies or venture-backed AI startups. As a result, attracting these individuals often requires customized compensation packages, including sizable sign-on awards with non-standard vesting schedules. In many cases, these awards are large enough to require Compensation Committee approval, leading to a notable increase in Committee- and Board-level engagement around talent strategy in the AI and broader technology domains.

The integration of AI talent at the non-executive level also presents pay equity considerations. In some instances, market-competitive compensation for AI specialists may push up against or even exceed that of existing executives within the same or adjacent functions. This dynamic has the potential to create internal tension if not carefully managed. Organizations should proactively set expectations, be ready to communicate the rationale for these compensation decisions, and revisit internal compensation structures to ensure fairness and alignment with strategy.

For existing executives and employees whose roles are expanding to include AI-related responsibilities, companies may need to make additional investments in training and upskilling. As these roles evolve in complexity, organizations should assess whether current compensation structures appropriately reflect the changing scope of responsibility. Benchmarking to emerging market data, while still limited, will become increasingly important in ensuring pay remains aligned with role content and performance expectations.

At the governance level, current oversight of AI is most often incorporated into the mandates of existing Board Committees, such as Audit, Risk, or Technology, rather than prompting the formation of new Committees. Looking ahead, we may see the creation of dedicated Technology, Risk, or Cybersecurity Committees, increased recruitment of directors with AI expertise, and adjustments to Committee-level compensation in recognition of expanding oversight duties. These changes will likely unfold gradually as companies continue to assess the strategic and risk-related implications of AI at the Board level.

Conclusion

As companies adapt their leadership and oversight structures to meet the demands of AI, compensation is becoming a key lever. Recruiting specialized AI talent often requires customized, high-value pay packages, sometimes exceeding standard frameworks and prompting greater Compensation Committee involvement. Internally, these dynamics raise questions around pay equity and performance alignment, especially as existing executives assume AI-related responsibilities that may shift role complexity and market benchmarks. At the board level, expanded committee mandates tied to AI oversight could eventually influence director pay, particularly where responsibilities grow meaningfully.

While many practices are still taking shape, the evolving AI landscape is already influencing compensation strategies in visible and important ways.

Compensation Advisory Partners (CAP) reviewed annual and long-term incentive program design practices across 52 companies in the Technology industry. These companies were split into three groups by revenue size: $500 million to $2 billion (“Small”), $2 billion to $5 billion (“Medium”), and over $5 billion (“Large”) in revenue.

Incentive plans play a crucial role in motivating and rewarding executives for achieving short- and long-term financial and strategic objectives. This research is intended to cover key trends in annual incentive and long-term incentive program design for the technology industry.

Key Findings

Annual Incentive Plans

• Revenue and profitability are the most common metrics
• Complexity of plans (i.e., number of metrics and use of non-financial measures, etc.) increases as company size increases

Long-Term Incentive Plans

• Use of performance plans is nearly universal among CAP’s sample
• TSR is the most prevalent metric among larger companies; smaller companies focus on growth measures such as ARR balanced with profit-based metrics
• Emphasis on performance-based equity grows as companies get further from IPO and grow in size

Annual Incentive Program

Performance Metrics

As technology companies grow, their annual incentive (AI) plans become more complex, incorporating a greater number of metrics. While most companies in the sample use two to three metrics, larger firms are more likely to include non-financial measures, and smaller companies tend to focus solely on financial metrics.

Metric Prevalence

Revenue is the most prevalent metric in AI programs across the companies studied, demonstrating its importance as a key performance indicator in the industry. Profitability metrics are the second most common and indicate another strategic priority.

Among smaller companies, ARR and Bookings are widely used; almost half of companies in the small and medium sample use these measures. Companies typically use metrics that are easy to measure (or set goals for) and reinforce strategic priorities. Smaller companies tend to focus on growth, as evidenced by the use of ARR and Bookings, while larger companies are more focused on sustained performance.

Individual performance also factors into AI programs at many companies in the sample, and it is generally applied as a modifier or discretionary adjustment rather than a weighted funding component. Notably, out of the total sample, only two companies incorporate individual performance as a formal weighted metric.

The inclusion of strategic and ESG goals in AI programs shows a clear upward trend with company size, however, overall use of these non-financial metrics is still a minority practice. Practice is mixed across the sample for how companies incorporate strategic and ESG goals into their plans, as either an award component (which may be a basket of metrics) or as a multiplicative modifier.

Larger companies tend to prioritize ESG metrics such as diversity, equity, and inclusion (DE&I) and environmental or sustainability issues. Smaller companies focus more on strategic measures such as product development and innovation to prioritize the growth of their company. Other strategic priorities used as non-financial measures include employee engagement and talent development goals, which are prevalent across all revenue groups. These trends highlight the increasing importance of aligning executive actions and incentive reward programs with company values and long-term sustainability objectives.

Long-term Incentive Program

Long-term Incentive Mix

Long-term performance plans are highly prevalent among all company size groups. Time-based restricted stock unit (RSU) plans are used for the other NEOs at all of the small companies and most of the medium and large companies. For CEOs, however, RSUs are not as ubiquitous at the larger companies (58% of companies). Stock options are granted to 33% of CEOs in the large company sample, compared to 16% in the medium company sample and 0% in the small company sample; similar prevalence applies to the other NEOs in each sample.

The large company group grants a greater proportion of executives’ long-term incentive program in long-term performance plans and stock options than the small and medium company groups. Performance plans being used less frequently at the smaller companies indicates the difficulty in long-term goal setting for these organizations. When they are used, they account for a smaller portion of the overall LTI program.

Performance Metrics

The number of metrics used in long-term performance plans by tech companies varies, showing no clear trend as it relates to company size. However, across all size groups, the most common approach is to use two metrics (43% of companies in the total sample).

Metric Prevalence

Long-term incentive metrics used vary significantly by company size, reflecting different company objectives across the revenue groups. Relative TSR is most prevalent among large and medium companies, used by 100% and 64%, respectively, compared to 39% of small companies. Tech companies across all revenue groups rely on established market indices to benchmark their TSR performance and use of a custom peer group is rare. Smaller tech firms also experience greater stock price fluctuations (sometimes out of management’s control), making TSR a less reliable metric of overall company performance.

Revenue is a widely used financial metric after TSR (56% of small companies, 50% of large, and 43% of medium). Smaller companies more frequently use ARR (44% of companies) and EBITDA / Operating Income Margin, used by 28%, highlighting a focus on company growth. Given the stock price volatility in smaller firms, they are more likely to rely on alternative financial measures instead of TSR. Margin-based metrics are particularly common because it is easier to set goals over a longer performance period.

Performance periods for small companies are typically shorter, often spanning one year (with additional vesting) or spanning three years with annual goal-setting for three discrete one-year measurements. This is partly because smaller firms face greater uncertainty in forecasting long-term performance, making it more challenging to set reliable multi-year goals. Larger companies use longer performance periods (typically three years), aligning executives with long-term company performance and sustainability.

Concluding Thoughts

While incentive design practices vary across companies, organizations of all sizes in the technology industry focus on growth and profitability. Incentive plan design supports these financial priorities while also tying in other strategic priorities through use of individual performance, non-financial measures and time-based equity vehicles. Incentive plan design evolves as a company grows, more aligned in structure with broader industry trends. Technology companies face unique challenges in keeping up with ever-changing market dynamics, so we expect incentive plan design to continue to adjust over time to keep up with macro-economic trends that impact these organizations.

Alex Barrionuevo, Gray Broaddus, and Cedrick Jean-Louis provided research assistance for this report.

Research provided by Han Wen Zhang.

Effective November 9, 2020, the Securities Exchange Commission (SEC) issued final rules that modernized the requirements of Regulation S-K applicable to disclosure of the description of the business (Item 101), legal proceedings (Item 103) and risk factors (Item 105). The new rules require companies to greatly expand their human capital management disclosure using a principles-based approach. Relatively few aspects of the rules are prescriptive, giving companies wide latitude to tailor disclosure. Given this latitude, we anticipate that companies will struggle when deciding what human capital disclosure should be included in their 10-Ks. CAP has reviewed early disclosures to provide some guidance to calendar year end companies on the topics that early human capital disclosures address and how much detail companies have typically provided.

Compensation Advisory Partners (CAP) provides a summary of the amendments of Regulation S-K related to human capital disclosure below. We also reviewed a sample of human capital disclosures made by early filers with fiscal years ending before December 31, 2020. Insights gleaned from our review will be helpful to calendar year companies who will soon be crafting their own human capital disclosure for the first time early in 2021.

Summary of Revisions to Item 101(c)(2)(ii)

The final rules amend Item 101(c) (Description of Business) to include a description of a registrant’s human capital resources to the extent the disclosure is material to an understanding of the business as a whole, except that, if the information is material to a particular reportable segment, that segment should be identified. The SEC also describes its rationale for the principles-based approach it advocates which may be helpful to registrants as they expand their description of their businesses to cover the human capital disclosure. The final rules are designed to provide investors with information on material aspects of a business’ operations, financial condition and prospects that reflect how management and the board of directors manage the business and assess its performance.

Amended Text of Item 101(c)(2)(ii):

Provide “A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).

Prior to this amendment, required disclosure related to human capital was limited to the registrant’s number of employees. Clearly, a broad mandate to disclose material measures or objectives related to human capital and used to manage the business substantially raises the bar for corporate disclosure.

The new rules are also creating some concern and confusion for companies trying to comply with the amendments for the first time. For example, the SEC declined to define human capital management, instead taking the position that it was likely to evolve over time. In addition, input received during the public comment period prior to the release of the final rules makes it clear that companies are concerned that potential metrics are not standardized or defined in any way, making comparative assessments very difficult.

What We Are Seeing

To date, only a limited number of well-known companies have issued human capital disclosure. Nevertheless, certain trends are developing. To date, examples of more robust disclosure are running to 1,000 — 1,500 words. Wells Fargo is among the leaders with voluntary disclosure provided in its proxy statement prior to the implementation of final rules of almost 6,800 words. Less detailed disclosure is provided by other companies, usually in about 300 — 500 words.

One company offered limited information on the number of employees in only 63 words. We can only conclude that they believe that the human capital metrics and objectives used in their business are not material to their business results.

Most companies publish their human capital disclosure in the Description of the Business found at the beginning of 10-Ks. A few companies — QUALCOMM and Visa, for example — provide a few paragraphs on human capital in the 10-K and refer the reader to a much longer discussion in their proxy statement or documents posted to company websites

Popular topics commonly addressed include:

• Facts about the make-up of the work force, including total number of employees, number or percentage in each major geography, breakdowns by type of employee, including full-time, part-time and seasonal, as well as management, administrative, engineering, skilled trades and hourly workers whether union or non-union;
• A statement of company culture and identification of core values;
• Description of governance and oversight of human capital initiatives by the board of directors, senior management and, in some cases, various councils or advisory groups composed of employees;
• Initiatives and statistics relating to diversity and inclusion;
• An overview of total rewards, with greater emphasis on all-employee programs, such as retirement and welfare benefits or a commitment to living wages;
• Discussion of talent development and training;
• Recruiting and retention practices;
• Use of employee engagement surveys;
• Pay equity; and
• Health and safety initiatives and metrics.

Note that the companies that we reviewed generally do not address all of these topics. Instead, most companies chose the 3 to 6 topics from this menu that they see as most relevant to their industry and business strategy. Quite clearly, human capital management disclosure will be highly individualized and it will be difficult — if not impossible — to make comparisons between companies, even direct competitors operating in the same space.

CAP’s Assessment

As a review of the examples provided above makes clear, most disclosures to date depend heavily on a qualitative description of core values, programs and practices. Very few companies are disclosing actual objectives and/or metrics used to manage the business. Examples of specific metrics or objectives are limited to the following among the companies reviewed here:

• Tyson Foods discloses that increasing its employee retention rate is a goal but does not disclose numerical objectives. Actual results (i.e., a 1% increase) are disclosed. (See “Diversity and Inclusion”)
• Visa stands out by disclosing that it recently established goals to increase the number of employees from underrepresented groups at the vice president level and above in the U.S. by 50 percent in three years and to increase the number of employees from underrepresented groups in the U.S. by 50 percent in five years. (See “Diversity and Inclusion”)
• Wells Fargo discloses the adjusted pay gap between (1) women and men and (2) people of color and their white peers (both are more than 99 cents for every $1) and reports that the unadjusted pay gap is higher than the company would like them to be. (See “Annual Pay Equity Review”)
• Both Broadcom and QUALCOMM reported metrics on voluntary attrition that were lower than a technology industry benchmark survey published by Aon. (See “Talent Development”)
• Jacobs Engineering and Tyson Foods both reported their recordable incident rates, citing OSHA benchmarks. Tyson Foods further disclosed a goal of a 10% annual reduction in recordable incidents. (See “Health and Safety”)
• TE Connectivity lists key talent metrics but provides no data. (See “Other”)

Surprisingly, we did not see companies disclose productivity metrics — for example, revenue per employee, growth in sales relative to growth in compensation costs, or compensation costs as a percentage of revenue.

We think this indicates that human capital management will change over time. Consulting firms, data analytics shops and government will publish more information on benchmarks. Human capital metrics will become more standardized. This will allow for more robust disclosure as companies try to find better measurements of the ROI on human capital and link it to financial metrics important to shareholders and the investment community at large.

* * * * * *

Below we provide some examples of disclosure that we found particularly effective in communicating human capital priorities.

Employees

Example 1: QUALCOMM (10-K dated November 2020)

“At September 27, 2020, we had approximately 41,000 full-time, part-time and temporary employees, the overwhelming majority of which were full-time employees. During fiscal 2020, the number of employees increased by approximately 4,000, primarily due to increases in engineering resources. Our employees are represented by more than 100 self-identified nationalities working in over 150 locations in 32 different countries around the world. Collectively, we speak more than 60 different languages.”

Example 2: Rockwell Automation (10-K dated November 2020)

Example 3: Starbucks (10-K dated November 2020)

“As of September 27, 2020, Starbucks employed approximately 349,000 people worldwide. In the U.S., Starbucks employed approximately 228,000 people, with approximately 220,000 in company-operated stores and the remainder in corporate support, store development, roasting, manufacturing, warehousing and distribution operations. Approximately 121,000 employees were employed outside of the U.S., with approximately 118,000 in company-operated stores and the remainder in regional support operations. The number of Starbucks partners represented by unions is not significant. We believe our efforts in managing our workforce have been effective, evidenced by a strong Starbucks culture and a good relationship between the company and our partners.”

Example 4: Tyson Foods (10-K dated November 2020)

“As of October 3, 2020, we employed approximately 139,000 team members. Approximately 120,000 team members were employed in the United States, of which approximately 114,000 were employed at production facilities, and approximately 19,000 team members were employed in foreign countries, primarily in Thailand and China. Approximately 31,000 team members in the United States were subject to collective bargaining agreements with various labor unions, with approximately 37% of those team members at locations either under negotiation for contract renewal or included under agreements expiring in fiscal 2021. The remaining agreements expire over the next several years. Approximately 5,000 team members in foreign countries were subject to collective bargaining agreements. We believe our overall relations with our workforce are good.”

Company Culture and Core Values

Example 5: Applied Materials (10-K dated December 2020)

“Applied’s commitment to innovation begins with the commitment to creating an environment in which Applied’s employees can do their best work…To achieve this level of value creation, Applied believes it must find, develop and keep a world-class global workforce. The Company invests in its employees by providing quality training and learning opportunities; promoting inclusion and diversity; and upholding a high standard of ethics and respect for human rights.”

Example 6: Jacobs Engineering (10-K dated November 2020)

“At Jacobs, our people are the heart of our business. With our culture of caring and inclusion as our foundation, we celebrate the differences that drive our collective strength and encourage our employees that there is no limit to who they can be and what we can achieve. Together we deliver extraordinary solutions for a better tomorrow and live by our employee value statement: Jacobs. A world where you can.”

Example 7: TE Connectivity (10-K dated November 2020)

“Our employees are responsible for upholding our purpose—to create a safer, sustainable, productive, and connected future; our values—integrity, accountability, teamwork, and innovation; and our strategy, execution, and talent (“SET”) leadership expectations…We embrace diversity and inclusion. A truly innovative workforce needs to be diverse and leverage the skills and perspectives of a wealth of backgrounds and experiences. To attract a global workforce, we strive to embed a culture where employees can bring their whole selves to work.”

Governance and Oversight

Example 8: Starbucks (10-K dated November 2020)

“We recognize the diversity of customers, partners and communities, and believe in creating an inclusive and equitable environment that represents a broad spectrum of backgrounds and cultures. Working under these principles, our Partner Resources Organization is tasked with managing employment-related matters, including recruiting and hiring, onboarding and training, compensation planning, performance management and professional development. Our Board of Directors and Board committees provide oversight on certain human capital matters, including our Inclusion and Diversity programs and initiatives. As noted in its charter, our Compensation and Management Development Committee is responsible for periodically reviewing Starbucks partner resource programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices and strategies. Our Audit and Compliance Committee works closely with the Risk Management Committee, led by Starbucks cfo and general counsel, to monitor current and emerging labor and human capital management risks and to mitigate exposure to those risks. Furthermore, our Nominating and Corporate Governance Committee annually evaluates the effectiveness of our social responsibility policies, goals and programs, which also include partner-related issues. These reports and recommendations to the Board and its committees are part of the broader framework that guides how Starbucks should attract, retain and develop a workforce that aligns with our values and strategies.”

Diversity and Inclusion

Example 9: QUALCOMM (10-K dated November 2020)

“We believe that a diverse workforce is critical to our success, and we continue to focus on the hiring, retention and advancement of women and underrepresented populations. Our recent efforts have been focused in three areas: inspiring innovation through an inclusive and diverse culture; expanding our efforts to recruit and hire world-class diverse talent; and identifying strategic partners to accelerate our inclusion and diversity programs.

We have a number of employee networks that enhance our inclusive and diverse culture, including those supporting Women, Africans and African Americans, Latinos, Veterans, the LGBTQ+ community and employees with disabilities.

We continue to recruit technical talent in diverse communities, including by engaging as a high-level sponsor of professional conferences, such as the Grace Hopper Celebration, the Society of Hispanic Professional Engineers National Convention and the National Society of Black Engineers National Convention. We also continue to recruit from a variety of colleges including Hispanic-Serving Institutions, Historically Black Colleges and Universities and Women’s Colleges.

Our continued engagement with organizations that work with diverse communities has been vital to our efforts to increase women and minority representation in our workforce. For example, we partner with AnitaB.org to benchmark our progress and identify promising practices for recruiting, retaining and advancing women technologists and support its research initiatives related to attracting and retaining women and underrepresented minority students in computing majors. We, alongside other top technology companies, helped form the Reboot Representation Tech Coalition, which aims to double the number of Black, Latinx and Native American women receiving computing degrees by 2025. In collaboration with the National Foundation for Autism Research, we started an internship program to welcome those with autism into our Company. Through our collaboration with Disability:IN’s Inclusion Works program, we have increased our ability to address the needs of individuals with disabilities.

In an effort to provide additional transparency into our efforts to increase underrepresented populations in our workforce, we intend to disclose our 2020 Consolidated EEO-1 Report after our submission of the report to the U.S. Equal Employment Opportunity Commission.”

Example 10: Rockwell Automation (10-K dated November 2020)

Example 11: TE Connectivity (10-K dated November 2020)

“Our employee resource groups (“ERGs”) are company-sponsored groups of employees that support and promote certain mutual objectives of both the employees and the company, including inclusion and diversity and the professional development of employees. The ERGs provide a space where employees can foster connections and develop in a supportive environment. As of fiscal year end 2020, we had six ERGs—ALIGN (LGBTQ), Women in Networking, TE Young Professionals, African Heritage, TE Veterans, and Asian Heritage. We are focused on recruitment of diverse candidates and on internal talent development of our diverse leaders so that they can advance their careers and move into leadership positions within the company.”

Example 12: Tyson Foods (10-K dated November 2020)

“We have a goal to build a highly engaged team by increasing retention year over year. For fiscal 2020, our domestic workforce realized a 1% increase in retention rate from fiscal 2019. As of October 3, 2020, our domestic workforce was approximately 40% gender diverse, and of our domestic team members, our workforce was approximately 33% white, approximately 27% Hispanic or Latino, approximately 25% Black or African American, and approximately 11% Asian American.”

Example 13: Visa (10-K dated November 2020)

“Our culture is underpinned by our core values, including an unwavering commitment to inclusion and diversity. In 2020, we established goals to increase the number of employees from underrepresented groups at the vice president level and above in the U.S. by 50 percent in three years and to increase the number of employees from underrepresented groups in the U.S. by 50 percent in five years. Visa’s commitment to diversity recruiting includes partnering with a number of non-profit and community organizations to support and develop a diverse talent pipeline. For example, Visa established the Black Scholars and Job program, a $10 million fund to create a dedicated Visa scholarship assistance program over the next five years, specifically for college-bound Black students. Upon graduation, all recipients who have met their commitments will be guaranteed a full-time job with Visa. Visa is committed to pay equity, regardless of gender or race/ethnicity, and conducts pay equity analyses on an annual basis.”

Example 14: Wells Fargo (Proxy dated March 2020)

Employee Engagement

Example 15: Applied Materials (10-K dated December 2020)

“Applied manages and measures organizational health with a view to gaining insight into employees’ experiences, levels of workplace satisfaction, and feelings of engagement and inclusion with the company. The Company uses McKinsey & Company’s Organizational Health Index (OHI) and employee engagement pulse surveys to measure its organizational health and employee experiences. In fiscal 2019, Applied achieved an overall “healthy” rating on the OHI and continued to rank in the top quartile for overall health in the McKinsey database. Insights from the Company’s OHI survey are used to develop both company-wide and business unit level organizational and talent development plans.”

Total Rewards

Example 16: Agilent Technologies (10-K dated December 2020)

“We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. We provide our employees with competitive salaries and bonuses, opportunities for equity ownership, development programs that enable continued learning and growth and a robust employment package that promotes well-being across all aspects of their lives, including health care, retirement planning and paid time off.”

Example 17: QUALCOMM (10-K dated November 2020)

“We provide robust compensation and benefits programs to help meet the needs of our employees. In addition to salaries, these programs (which vary by country/region) include annual bonuses, stock awards, an Employee Stock Purchase Plan, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, adoption and surrogacy assistance, employee assistance programs, tuition assistance and on-site services, such as health centers and fitness centers, among many others. In addition to our broadbased equity award programs, we have used targeted equity-based grants with vesting conditions to facilitate retention of personnel, particularly those with critical engineering skills and experience.”

Example 18: Starbucks (10-K dated November 2020)

“We have demonstrated a history of investing in our workforce by offering competitive salaries and wages. To foster a stronger sense of ownership and align the interests of partners with shareholders, restricted stock units are provided to eligible non-executive partners under our broad-based stock incentive programs. Furthermore, we offer comprehensive, locally relevant and innovative benefits to all eligible partners. In the U.S., our largest and most mature market, these include, among other benefits:

• Comprehensive health insurance coverage is offered to partners working an average of 20 hours or more each week.
• 100% tuition coverage is provided to partners who earn a bachelor’s degree online at Arizona State University through the Starbucks College Achievement Program.
• Parental leaves are provided to all new parents for birth, adoption or foster placement.
• A Partner and Family Sick Time program is provided and allows partners to accrue paid sick time based on hours worked and use that time for themselves or family members in need of care.
• Care@Work benefit provides partners with subsidized child, adult or senior care planning services. This benefit includes up to 20 days of subsidized backup care services through the end of fiscal 2021,…

Outside of the U.S., we have provided other innovative benefits to help address market-specific needs, such as providing interest-free loans to our U.K. partners to help cover rental deposits, mental health services in Canada, and in China, a monthly housing subsidy for full-time Starbucks baristas and shift supervisors , as well as comprehensive health insurance coverage for parents of partners.”

Talent Development

Example 19: Agilent Technologies (10-K dated December 2020)

“As part of our promotion and retention efforts, we also invest in ongoing leadership development through programs such as our Emerging Leader Program, our Managing at Agilent programs and our experienced managers’ Accelerate program.”

Example 20: Applied Materials (10-K dated December 2020)

“Applied believes continuous learning by its people feeds the Company’s pipeline of innovation and pays off in employee retention. Applied’s business units maintain an independent strategy for skill-building, using content that is owned, supervised, developed, and managed by each unit’s learning team. At the same time, these skill-building programs are aligned around a common set of objectives and framework focused on compliance, technical, professional and management development. There is an expectation that every employee has a development goal as a part of individual performance objectives. Historically more than 85% of employees have had development objectives.”

Example 21: Broadcom (10-K dated December 2020)

“As the source of our technological and product innovations, our engineering and technical personnel are a significant asset. Competition for these employees is significant in many areas of the world in which we operate, particularly in Silicon Valley and Southeast Asia where qualified engineers are in high demand. We track and report internally on key talent metrics including the portion of our workforce in research and development and the voluntary attrition rate. During fiscal year 2020, our voluntary attrition rate was 7%, below the technology industry benchmark (AON, 2020 Salary Increase and Turnover Study — Second Edition, September 2020).”

Example 22: QUALCOMM (10-K dated November 2020)

“Our global workforce is highly educated, with the substantial majority of our employees working in engineering or technical roles (many of whom help develop foundational technologies for both our QCT semiconductor business and our QTL licensing business). During fiscal 2020, our voluntary turnover rate was less than 5%, below the technology industry benchmark, which is comprised of certain of our key competitors (Aon, 2020 Salary Increase and Turnover Study — Second Edition, September 2020).”

Health and Safety

Example 23: Jacobs Engineering (10-K dated November 2020)

“BeyondZero® is our approach to the health, safety and security of our people, the protection of the environment and the resilience of Jacobs. In fiscal 2020, we continued to demonstrate safety excellence with another year of zero employee fatalities at work, a 25% reduction in employee recordable incidents from fiscal 2019, and a total recordable incident rate of 0.17 (recorded in accordance with OSHA record keeping requirements) as of October 2, 2020 — compared to the North American Industry Classification System’s most recently reported aggregate rate of 0.60.

While our BeyondZero journey started with safety, as we continued to drive our injury rates down, we also expanded our thinking to our broader culture of caring and particularly mental health. It was this strong foundation that helped us act swiftly at the start of the COVID-19 pandemic. The foundation elements of our existing “Mental Health Matters” program enabled us to respond quickly to launch our “Mental Health Matters Resiliency” program and to promote our suicide awareness campaign in fiscal 2020.

In fiscal 2020, almost 2,000 Positive Mental Health Champions (an 11% increase from fiscal 2019) trained to support the mental wellbeing of our employees and one in every 29 employees trained as a Positive Mental Health Champion. In addition, 100% of Jacobs’ Executive Leadership Team participated in Positive Mental Health training.”

Example 24: QUALCOMM (10-K dated November 2020)

“The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work or that impact their financial well-being; that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having the vast majority of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work.”

Example 25: Starbucks (10-K dated November 2020)

“We view mental health as a fundamental part of our humanity and implemented a comprehensive suite of related” programs and benefits in fiscal 2020. These include Headspace, an online application that enables guided mediation, Lyra, which provides mental health coaching, and Starbucks Mental Health Fundamental Training, created in partnership with National Council for Behavioral Health, which offers ongoing training to help partners recognize and respond to signs of mental health and substance use issues.”

Example 26: Tyson Foods (10-K dated November 2020)

“We maintain a safety culture grounded on the premise of eliminating workplace incidents, risks and hazards. We have created and implemented processes to help eliminate safety events by reducing their frequency and severity. We also review and monitor our performance closely. Our goal is to reduce Occupational Safety and Health Administration (“OSHA”) recordable incidents by 10% year over year. During fiscal 2020, our recordable incident rate declined 17% compared to fiscal 2019. In response to the global novel coronavirus pandemic (“COVID-19” or “pandemic”), we have implemented and continue to implement safety measures in all our facilities. As an expansion of our We Care workplace safety program and continued efforts to boost the overall health and wellness of our workforce, we are piloting health clinics near our production facilities, giving team members and their families easier access to high-quality healthcare.”

Other

Example 27: QUALCOMM (10-K dated November 2020)

“We encourage you to review the “Our People” section of our March 2020 Corporate Responsibility Report (located on our website) for more detailed information regarding our Human Capital programs and initiatives. Nothing on our website, including our Corporate Responsibility Report or sections thereof, shall be deemed incorporated by reference into this Annual Report.”

Example 28: TE Connectivity (10-K dated November 2020)

“We track and report internally on key talent metrics including workforce demographics, critical role pipeline data, diversity data, and engagement and inclusion indices.”

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:

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.

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.

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.