May 10, 2021 Executive Compensation ESG & Human Capital Management Articles

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SPACs, ESG Issues Raise Responsibilities For Post-IPO Compensation Committees

Going public means adding structure and formality to many areas of a company. Part of that structure includes forming a compensation committee with a clear charter, delineated responsibilities, and a calendar of actions.

In the months before an initial public offering (IPO), compensation planning often takes a back seat to more immediate business demands. But not prioritizing executive compensation pre-IPO can lead to reactive pay decisions that neglect to consider public-company dynamics, or that foster inequities internally or versus the market.

Pre-IPO, when nearly all investors are represented on the board and external dynamics are less influential, the board can often make decisions quickly. After the company commits to going public, executive pay decisions need more thought and deliberation to ensure that all stakeholders (management, employees, legacy and new investors, etc.) are considered. Ad-hoc decision-making, which works well for many private firms, will not cut it in the public realm. Without a strong, structured process, important items can slip through the cracks.

The past year has added two areas of consideration to the committee-forming process, as well: nuances specific to special-purpose acquisition companies (SPACs), and nonfinancial metrics of environmental, social, and governance (ESG) concerns.

The Nuances of SPAC

While most SPAC pay-related decisions are similar to those of a traditional IPO, three nuances create uncertainty and complexity:

  1. The need for structure puts pressure on the already tight timeline for decision-making. In traditional IPOs, the original investors usually continue on the board with a few independent directors added. This continuity from pre- to post-IPO means that most committee members have a shared understanding of both past policies and post-IPO goals. With that common ground, the committee can get by with just the basics of process and structure. For a SPAC, the compensation committee consists of a mix of company organizers, original investors in the acquired firm, and a few independent directors. Thanks to the speed at which SPACs are usually organized and go public, this group gets together for the first time post-SPAC, so they require a good deal of process to be able to share information and gain consensus. The accelerated post-SPAC timeline exacerbates this issue.
  2. All decisions are made within the context of the business combination. Major decisions around go-forward pay, equity pools, employee stock purchase plans, and directors are addressed within the context of the “deal,” and therefore can involve greater degrees of freedom for the company and management of the acquired firm to negotiate. For the acquired company, it is important to determine which decisions should be made prior to entering negotiations (e.g., adjustments to cash compensation) and which should be negotiated as part of the transaction (e.g., equity pool).
  3. Some committee members are not at the table when foundational decisions are made. The newly formed committee comes together after the business combination and may have to live with decisions that many of the members did not directly make.

The Committee’s Broader Role

The compensation committee has expanding responsibility for reviewing human capital management (HCM) and ESG issues. Accordingly, the committee needs to be thoughtful about two decisions: how and when it takes on broader responsibility, and whether nonfinancial ESG or HCM metrics should play a role in incentives. After all, post-IPO companies usually have limited resources and need to focus on near-term priorities. Today, the pressure to consider these items sits mainly with larger, established companies. But even newer public organizations will benefit from starting the conversation and planning for if and when stakeholders raise the issue. For some newly public companies, aspects of HCM or ESG may already be part of their strategies, putting these items on the compensation committee’s agenda immediately.

No matter the why and how of going public, this big step requires a new mind-set about director responsibilities.

View the full article as it was originally published.

Greg Arnold

Stephen Charlebois

This article was originally published in NACD/Directorship.

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