Tina Murphy
With the resurgence of IPO activity, companies are moving toward the public markets at an accelerated pace. As outlined in a recent Meridian article by my colleague, Kartik Balaram, a thoughtful and well-sequenced approach to compensation planning is critical to a successful transition.
However, experience shows that even well-structured processes can break down in execution. At Meridian, we’ve worked with many companies through the IPO journey, and while each situation is unique, one theme is consistent: executive compensation and governance become significantly more complex once a company goes public—and missteps often only become visible after the fact.
In a private company environment, compensation is largely discussed internally among founders, management, and investors. Once public, those decisions are suddenly reviewed by shareholders, proxy advisors, regulators, and sometimes even the media. From a Compensation Committee perspective, this shift introduces not only complexity, but also governance risk and reputational exposure.
Against this backdrop, this article highlights five common executive compensation pitfalls we see in IPO transactions – and how these issues can manifest in practice if not addressed early.
1. Waiting Too Long to Design the Compensation Program
A common pattern is treating compensation as a final step in the IPO process. In reality, it should be addressed well in advance of the transaction. Public company compensation programs typically involve:
• A defined compensation philosophy
• Benchmarking against a peer group and/or relevant survey data
• A well-thought-out mix of base salary, annual bonus, and long-term equity incentives
• A program that can cascade from the executive level throughout the entire organization
Companies that delay these decisions often find themselves scrambling to implement programs under tight timelines and heightened visibility. This can result in compensation structures that lack clear alignment to strategy or market norms, requiring frequent adjustments in the company’s young public life. From a Compensation Committee perspective, this dynamic can create governance challenges and increased scrutiny, particularly when early disclosures suggest a lack of consistency or rigor. In addition, early decisions made under time pressure often become embedded in initial disclosures and peer group positioning, making them more difficult to revisit once the company is public.
2. Over-Reliance on One-Time Equity Grants
Private companies frequently rely on large, one-time equity grants to attract and retain talent. But public companies operate differently. Instead of large, up-front grants, public companies typically shift to annual equity grant cycles with multi-year vesting and potential performance conditions. Without making this transition, companies can quickly run into the following challenges:
• Retention – Large upfront awards can lose their effectiveness over time. If the stock price declines, the award may no longer provide meaningful retention value, despite the company continuing to recognize the associated accounting expense. In addition, once a large grant cliff vests, there is often limited retention remaining in the program.
• Existing equity plan dilution – Large one-time grants can quickly deplete the available share reserve under the company’s equity plan, increasing dilution and limiting capacity for future equity awards.
• Lack of flexibility – These awards lock the company into a specific compensation amount for years, even as company strategy and market conditions evolve.
The move to the public markets often requires rethinking how equity is granted and refreshed over time to support sustained retention and alignment. A common pattern we see in IPO transitions is companies granting a significant portion of executive equity in a single award at IPO. While the intent is often to provide long-term retention, a decline in stock price following the IPO can reduce the perceived value of the award, and companies may face retention concerns within the first year as a public company. At the same time, the size of the initial grant can limit flexibility to issue additional equity without increasing dilution, creating both internal challenges and external scrutiny once disclosed.
3. Underestimating External Scrutiny
In private companies, executive compensation discussions are limited to the boardroom – typically between founders, management, and investors. Once public, those decisions are disclosed and evaluated by a much wider group, including:
• Shareholders
• Proxy advisory firms (like ISS and Glass Lewis)
• Analysts
• Potential activist shareholders
• Members of the media
Even companies that qualify as Emerging Growth Companies – and receive certain disclosure accommodations – still face scrutiny from shareholders and proxy advisors. As a result, executive compensation programs must be structured to not only attract, retain, and motivate internally, but also hold up to external analysis – particularly around pay-for-performance alignment, the rigor of incentive goals, and the selection of an appropriate peer group. From a Compensation Committee standpoint, this means anticipating how decisions will be interpreted by shareholders and proxy advisors, particularly in the company’s first proxy season when credibility is still being established.
4. Not Compensating or Preparing the Board for Its Expanded Role
Going public significantly changes the role, responsibilities, and the scrutiny of the Board of Directors, particularly the Compensation Committee. Public-company Compensation Committees must be fully independent and take on expanded duties, including:
• Overseeing executive compensation design and pay philosophy and objectives
• Approving performance measures and targets, including administration of equity and incentive plans
• Managing proxy disclosure and governance expectations
• Responding to shareholder feedback and evolving governance standards
Boards that are not prepared for this shift can struggle to manage the increased workload and oversight required. At the same time, companies should ensure they have a thoughtfully designed independent director compensation program in place. Given the Board’s expanded responsibilities, public company directors expect compensation that is competitive with peers in both value and structure.
Establishing a clear compensation program and governance processes early can help ensure a smoother transition.
5. Treating Governance as a One-Time Exercise
Another common misconception is that once a public-company compensation structure is implemented, the work is done. Governance and executive compensation is an evolving process. Public companies typically develop an annual rhythm around compensation oversight that includes:
• A structured Compensation Committee calendar and work plan
• Annual peer group review and market reviews of executive and independent director compensation
• Continued evaluation of short-term operational goals and long-term value creation goals
• Ongoing engagement informed by Say-on-Pay results and proxy feedback
Companies that fail to establish this rhythm early may face inconsistent decision-making and increased scrutiny over time, particularly as shareholders evaluate the company’s governance maturity in the years following the IPO.
Going public is no longer just a financial milestone and a change in the company’s capital structure, it’s also a governance transformation. Executive compensation moves from a relatively private conversation to a highly visible element of corporate strategy. Companies that start preparing early – both in terms of compensation design and governance processes – tend to navigate this transition much more smoothly. And in today’s environment, where executive pay is closely scrutinized, those early decisions often shape how compensation holds up under scrutiny for years to come.