The Choice, Design and Strategic Implications of Executive Incentive Pay Schemes at the Time of an Initial Public Offering

This paper presents a descriptive survey of the choice and design of executive pay incentive scheme arrangements implemented at the time of a company’s initial public offering. Using a unique sample of 311 entrepreneurial companies over a five year period (1998-2002) it illustrates the strategic choices made with regards to incentive pay schemes by the board of directors at this crucial time in a company’s development. Furthermore, it discusses the importance of the configuration of incentive schemes in respect of three critical elements: the performance target, comparator, and target level requirement for the shares to vest. It finds that company’s choices are split between schemes that do have performance targets linked and others that are contrary to the guidelines of the Combined Code and best practice. In light of this it proposes strategic reasons why this might be the case for initial public offerings and develops this discussion in line with the uniqueness of this event.