Preparing for an IPO: Key Compensation Considerations & Governance Priorities

As private companies approach an initial public offering (IPO), executive compensation becomes a central element of public company governance, subject to significant external scrutiny. Compensation programs that were once confidential and flexible will soon be exposed to investor review, proxy advisor analysis, and regulatory disclosure requirements.

The months leading up to an IPO represent a critical planning window. During this period, companies must assess whether their existing compensation practices are competitive, defensible, and aligned with public company expectations. Some companies may already operate with compensation programs that resemble those of public companies, while others may need to make more deliberate adjustments.

This article outlines the key compensation considerations companies should address in advance of an IPO. The overarching objective is to build a framework that supports retention, aligns with long-term value creation, and meets the disclosure and regulatory requirements applicable to public companies. Decisions made during this period will form the foundation of the compensation programs that investors will evaluate once the company is public.

1. Executive Compensation Readiness

Identify competitive framework 

In preparation for potential compensation adjustments, companies typically develop a public company peer group to provide market context on pay levels and program design (e.g., bonus plan framework, and type, frequency, and design of equity awards).

Reviewing peer benchmarks helps companies understand how their compensation practices align or differ from public market expectations. The goal is not necessarily to immediately change compensation, but to identify potential gaps from public company norms.

Define pay philosophy and transition strategy

Once an assessment has identified how the existing compensation program compares to public company peers, the focus should shift to how the compensation philosophy is expected to evolve post-IPO. The intent should be to define a deliberate path from private company practices to a sustainable public company framework.

This forward-looking planning should include:

• Identifying roles or individuals where retention risks may emerge
• Evaluating whether existing practices support the company’s longer-term compensation philosophy in a public company setting
• Establishing a forward-looking compensation strategy, and determining if there is a desire to transition towards an annual pay model that is utilized by most public companies

In some cases, companies may intentionally maintain non-traditional compensation arrangements or choose a long transition period before switching to a standard public company pay program. Establishing this roadmap in advance helps set internal expectations and reduces the likelihood of ad hoc adjustments later.

Recognize increased scrutiny and reduced flexibility

Once public, compensation decisions for the top executive officers must be disclosed in the proxy filing and will become subject to greater scrutiny. Compensation committees face investor expectations around consistency, transparency, and alignment with performance. As a result, discretionary or non-standard pay decisions become more difficult to implement and rationalize. 

Private companies may rely on different compensation frameworks, particularly with respect to equity grant size, timing, and structure. If a company intends to make a one-time or non-traditional compensation decision, such as a large, front-loaded equity grant intended to cover multiple years of pay, the pre-IPO period may be the last practical opportunity to do so without heightened scrutiny. After the IPO, similar actions may draw unwanted attention from a broad group of public investors or proxy advisors.

2. Severance and Change-in-Control Arrangements

As companies prepare for an IPO, it is common to review existing severance and change-in-control arrangements to assess whether they are competitive for a public company. 

Companies typically review existing arrangements for consistency across executives, and alignment with the public company peer group. Key terms include defining the circumstances under which cash severance is payable, the magnitude and form of such payments, and the treatment of outstanding equity awards (e.g., vesting acceleration upon termination, change in control, or a qualifying termination following a change in control). Where legacy agreements differ from expected public company norms, companies can consider if it is reasonable to maintain terms for existing executives while adopting more uniform severance and change-in-control terms on a go-forward basis.

3. Non-Employee Director Compensation Program

Non-employee directors of public companies are compensated using formal, policy-based programs that are applied consistently to all directors. Development of the non-employee director compensation policy is often done well in advance of the IPO so that pay amounts can be communicated as a company begins recruiting independent directors to join the post-IPO board. Director compensation is typically benchmarked using the same public company peer group developed for executive compensation.

Key elements of a public company director compensation program include:

• A defined cash compensation structure, including board, committee, and chair fees
• The form and amount of initial and annual equity compensation
• Equity treatment for directors who join the board prior to the IPO
• Timing and service proration for the first public company equity grant

4. Public Company Stock Plan Design

As part of IPO preparation, companies must adopt an equity incentive plan that will govern post-IPO equity awards.

The two primary considerations include amounts for: 

1. The initial share reserve, which at a minimum, needs to be sufficient to support expected equity grants in the first year after IPO, ideally with a buffer
2. The evergreen provision, which automatically replenishes the stock plan pool each year to prolong the life of the share authorization

Plan terms should be drafted to provide flexibility while remaining consistent with how other newly public companies structure their stock plans.

5. Employee Stock Purchase Plan (ESPP)

ESPPs are commonly established at the time of IPO, although such plans can also be implemented after becoming public. It is often administratively simpler to have an ESPP approved and ready at the time of the IPO, even if participation in the first offering period begins at a later date.

Similar to the public company stock plan, key decisions for the ESPP include amounts for:

1.  The initial share reserve
2. The evergreen provision

Having an ESPP approved at IPO provides flexibility and avoids the need for a separate shareholder vote in the future.

6. Governance & Administrative Considerations

An IPO introduces new governance and disclosure requirements. Key items that may need to be addressed include:

• Developing a public company compensation committee charter
• Identifying Section 16(b) executive officers
• Implementing an SEC-mandated clawback policy
• Potentially establishing stock ownership guidelines, anti-hedging, anti-pledging, or insider trading policies
• Preparing compensation-related disclosures, which vary depending on whether the company qualifies as an Emerging Growth Company (EGC) or a Large Accelerated Filer. EGCs have less onerous disclosure requirements (e.g., Compensation Discussion and Analysis and Pay-versus-Performance disclosures are not required) and they are not subject to an advisory say-on-pay vote on executive compensation while maintaining EGC status.

Preparing for the Transition to a Public Company

The transition to public company compensation requires thoughtful planning around structure, governance, and disclosure. Companies that carefully assess their compensation programs, define their pay philosophy, and formalize governance practices are better positioned to withstand scrutiny, retain key talent, and establish credibility with investors.

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This blog was authored by Lauren Spencer with oversight by Jin Fu. Questions and comments can be directed to Ms. Spencer or Ms. Fu at lauren.spencer@fwcook.com and jin.fu@fwcook.com, respectively.

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