The Advisors' Blog

– Brandon Cherry, Presidio Pay Advisors

A while back, we conducted a study of IPO compensation and financial data that shows that over the past seven years, founder CEO equity holdings in companies going public have plunged. As a result, there is very little difference between ownership levels of founder and non-founder CEOs at the time of IPO (as noted in this WSJ article). This data came from our new IPO Pay Reporter™.

The study reveals that median founder CEO ownership at IPO fell to under three percent of total shares outstanding in 2008. This is down sharply from a high of over 10 percent in 2002. Conversely, non-founder CEO ownership has remained relatively consistent at slightly greater than one percent of total common shares outstanding at IPO.

Our analysis finds investors are returning to a more rational financial expectation of companies looking to raise public capital. This has forced a change in the financial profile and compensation strategies of IPO companies. In 2008, median company revenue, market capitalization and net income at IPO were at the highest levels since Presidio Pay Advisors began collecting IPO data in 2002.

In an effort to meet a more sustainable financial profile, companies are taking an additional two to three years to file for IPO. The most pronounced result is the dilution of founder CEO ownership; this is likely due to less favorable term sheets or additional rounds of financing required to reach IPO.

Our analysis also found that the mix between options and common stock ownership among all executives has undergone a transformation. In 2002, executive officers had a stronger link to investor success, with over 85 percent of their ownership in the form of common stock and less than 15 percent in stock options. By 2008, nearly 40 percent of executive officer ownership was stock options, which have no downside risk for executives, creating a potential disconnect between the financial interests of executives and company investors.

Other major findings include:

– Companies in 2008 awarded and reserved fewer shares for grants to employees; median stock option overhang was at its lowest level in seven years.

– Since 2005, a 24 percent rise in median CEO base salary has been offset by a 25 percent decrease in annual cash bonuses, leaving total cash compensation essentially unchanged for both founder and non-founder CEOs.