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IPO

There were 480 IPOs on the US stock market in 2020, an all-time record. This is +106% more than in 2019 with 233 IPOs. It is also 20% higher than the previous record IPO year of 2000, which had 397. 

This is indicative of two things. First, we are seeing a higher rate of innovation and entrepreneurship as more founders establish high-growth companies and take them public. Second, more companies are increasingly confident about their ability to take on the added complexity and public scrutiny that an IPO brings. 

However, with increasing confidence in the profile and growth-aspirations of these companies, are we also seeing a corresponding rise in how executives of pre-IPO companies are compensated? How can available data inform a company creeping steadily towards IPO about what to expect in salary levels and stock dilution by this stage? 

How can this help in strategizing executive pay and compensation practices, especially to achieve the complex goals of rewarding good executives, maintaining shareholder and investor confidence, avoiding public scrutiny, and ensuring pay and compensation scales retain a flexibility that provides ample leeway in future compensation negotiations. 

Pre-IPO figures – What does the research say? 

The period before going public is an important crossroads for most companies, especially those that have not come under VC tutelage before maturing this far. There are several critical compensation-related issues that companies must consider at this point, including how current pay and compensation practices/structures will scale after IPO. 

Approaches to compensation, whether cash, equity, bonus, or a combination of all three often differ markedly for pre-IPO and post-IPO companies. How significant the issues faced will be, and the nature of approaches used, will also differ based on several factors including the industry in question, CEO-antecedent, the specific profile of the company, and more. 

Research primarily indicates that companies typically adopt a range of approaches that may produce varying results, both at the peer group and industry stage. Broad trends can be understood from this data, and certain lessons may be drawn from isolated cases,

In 2015, Compensation Advisory Partners conducted an extensive study into pre and post-IPO executive compensation data from 65 companies across the biotechnology, internet software and services, and general industry sectors. The study found that cash compensation was higher in mature sectors like general industry, while high-growth sectors such as biotechnology and internet utilized greater equity compensation. Although, there was a general increase in cash compensation post-IPO for all companies. 

One reason advanced for this was the greater stability of companies in mature industries, who also typically have more cash to spend. But in high-growth industries, cash is at a premium and offering more in the way of equity compensation gives executives “skin in the game” and keeps them invested in the rapid growth of the company. 

A further 2019 study of pay and compensation figures from 124 tech companies pre-IPO, including Salesforce, Square, Google, and Amazon, found again that equity was the most significant pay strategy used to incentivize executives and reward them. Although they found that median salaries have increased to $300,000 between 2008 and 2019, compared to $214,000 between 1996 to 2007, there was less emphasis on cash and more on stock options, which is where the big money lies for CEOs. 

For context, Jack Dorsey at Square collected a salary of just $3,750 pre-IPO, and Jeff Bezos at Amazon took just $64,333. Yet, by the time of going public, both CEOs had 24% and 48% equity in their respective companies thereby earning millions (or billions in the case of Bezos). 

What is the takeaway? High salaries are not necessarily a guarantee of effectiveness. The median salary for CEOs at the most successful companies was only $300,000 a year. However, attractive pay packages can be critical to attracting and retaining top executives, especially for companies in more mature industries with cash to spare. 

CEO compensation more often falls along the lines of equity compensation, which provides mutual benefit overall for both company and individual. How does this research support your pay and compensation practices? 

Pay practices at IPO – What factors should underpin your consideration? 

As you approach IPO, consider the following in designing and implementing your pay and compensation structure: 

  • Expect to pay more cash: With the IPO complete, the big winners will have been those executives who obtained equity pre-IPO. Now, executives will expect to be paid in the same way as other public company execs. In addition, due to share dilution and a need to maintain a sufficient share reserve for future compensation negotiations, there will be an increased focus on cash compensation instead of equity. 
  • Plan for decline in share-based pay: Apart from the fact that cash compensation is typically more prevalent for post-IPO companies, there will be a need to carefully budget equity usage to manage burn rates over time. This ensures there’s a sufficient pool of equity overhang for future planning and compensation purpose. 
  • Fix inequities and imbalances: Prepare for inequities in executive pay, especially as between pre-IPO executives and post-IPO hires. Post-IPO hires should understand that the equity rewards of existing executives constitute the rewards of early loyalty. However, where there are inequities in executive pay pre-IPO, it is necessary to take corrective steps at this period. You will be unlikely to have the means or resources to put all executives on relatively fair standing after IPO. 
  • More disciplined approach to pay: Finally, companies approaching IPO will need to start looking critically at their pay structures with a view to developing a more disciplined approach. The goal during pre-IPO is often to secure the best talent and keep them in order to foster growth, and often, this does not admit of a structured approach and things are more likely to be messy. Put in the effort now to clean up your pay structures and enforce discipline to avoid ad hoc negotiations post-IPO. 

What are the practices that help long-term pay flexibility and integrity? 

How do you march into the future with the confidence that you have developed a pay and compensation structure that lets you achieve security and meet investor and regulator expectations? Consider implementing the following: 

  • Establish a compensation philosophy: These are the guiding principles of your compensation strategy. It should ideally include the objectives of your compensation program, your total pay mix, pay-for-performance approach, and more. The core of your philosophy should represent where you want to go compensation-wise as well as accurately reflect how you intend to manage executive pay. 
  • Develop a peer group: When thrashing out the mechanics of your pay and compensation structure, it makes sense to prepare an analysis of executive compensation in peer companies within the same industry. This can provide insight into common strategies and help ensure you are not underpaying or overpaying executives. However, you should be careful when selecting peers. Ensure their profile, performance, and revenue truly align with your own company, otherwise this may lead to incentive awards to your executives that are too generous or too small. 
  • Design a governance process: As a new public company, you can expect to come under close scrutiny, especially in relation to pay and compensation practices. Designing a governance process can help introduce transparency and integrity into the process. Set up a compensation committee with the freedom to consider and present short and long-term incentive plans to the board for adoption. 

Cowen Partners Executive Search

Cowen Partners is the nation’s executive search firm, enabling companies to harness the power of human capital to fuel their success. Cowen Partners gives our clients access to the top 1% of human capital to create opportunities that accelerate their growth and market share. With Cowen Partners, clients can grow at scale, create value, and drive results with world class talent.

Our clients are both small and large, publicly traded, pre-IPO, private, and non-profit organizations. Clients are typically $50 million to multi-billion dollar revenue Fortune 1000 companies or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite and include VP and Director level leadership roles.

With our proven processes and guaranteed results, we have successfully placed hundreds of candidates in industries including technology, healthcare, manufacturing, retail, financial services, and private equity.

Read more of our industry-leading resources to see why Cowen Partners is a leading retained executive search firm in New York City, Chicago, Seattle, San Francisco, Dallas, Los Angeles, and beyond:

Does my company need a formal board of directors? 

While the answer to this question varies depending on the unique growth stage and opportunities of each company, this is a question every founder asks at some point – often with great reluctance.

Understandably, many founders are less than keen on the subject of board recruitment. Stories abound of founders who were pushed out of their companies by the same board they brought on to advise them and help grow the company. Apart from the possibility of loss of control, many founders view boards as little more than a bureaucratic waste of time. 

However, boards are not necessarily set up to rob a founder of their well-earned success and push them out of their company. Neither are they solely bureaucratic organs that introduce unnecessary foot-dragging and red tape into growing companies. 

Many founders actually look back at the founding of their board as a critical moment in the long-term growth and success of their company, as well as their personal evolution as business leaders.

When properly recruited and managed, board leadership represents an asset for most companies, providing the experience and industry-competence needed to scale effectively. As a result, the question often isn’t whether board recruitment is good, but whether it is necessary considering the profile, growth stage, and specific goals of the company. 

Are you considering the merits of recruiting a formal board of directors for your growing company? Here, we explain the options available for company boards and best practices for identifying and recruiting an effective board of directors. https://cowenpartners.com/board-services/embed/#?secret=ajFnRU8rhL

The value of board recruitment

A formal board of directors is a group of individuals appointed or elected to represent the interests of the company as a whole. They support the management team with niche-specific knowledge and experience, and generally help implement good corporate governance standards. 

Most companies start out with a board of directors. To incorporate a company in the majority of countries around the world, there must be a board of directors – often with a requirement of at least two or three individuals on the board. However, these boards often operate informally, especially in the case of startups and early-stage companies. Privately-held companies that bootstrap their way to success may be able to meet operational challenges and scale at their own pace without needing the input of a formal board.

Formal board leadership often becomes necessary when the company is considering significant strategic moves, such as an IPO or a large funding round. Businesses that face significant threats or operate in an industry with rapidly-evolving growth opportunities may also find a board very helpful. In such situations, board leadership can provide extremely valuable guidance and support to the management team in navigating these challenges or exploiting available opportunities. 

Formal board leadership is critical to success for many companies, as the skillset provided by experienced board members can decide the overall strategy and trajectory of a business. As McKinsey reports, the presence of an effective board can be key to growth-strapping a business with exceptional potential and laying the foundations for a high-performing company. 

Types of boards you can consider

The question of board recruitment is far more fluid than most founders expect. You can recruit a formal board of directors that operates within as narrow a sphere of influence as you desire. Or you can create a board that introduces the highest standards of corporate governance and to which you are essentially accountable to. 

Board recruitment is never an “all-or-nothing” situation. Rather, there are several mutable components that can be reorganized and adapted to suit the specific goals you have for your company, starting with a range of board types you can consider. 

  • Fiduciary board: This is a board of directors in the common sense of the term. A fiduciary board functions in a formal capacity, with decision-making powers and usually with the authority to broadly question management decisions. Founders may elect to form a board of this nature to demonstrate good corporate governance and oversight practices that will appeal to investors. There will typically be two options to consider when creating a fiduciary board – founders may opt for a majority of independents, or an independent minority. Boards with a majority of independents are typically found in large privately-held companies and public companies. These boards exhibit a high degree of objectivity and are more likely to drive the company’s strategic agenda. On the other hand, fiduciary boards with a minority of independents aim to keep the number of outsiders low, with board seats mostly limited for people known to the founder or those already within the company. This can be a more comfortable option for founders that want to maintain control over the company while transitioning to more independent oversight. 
  • Advisory board: Compared to a fiduciary board, an advisory board operates in a less formal context. The primary function of this board is to provide high-level expertise and outside experience that the founder and their management team can draw on. These boards present an acceptable compromise between gaining the benefit of outside support on a broad range of issues and maintaining authority over the day-to-day operations and strategic vision of the company. 
  • Board of insiders: A board of insiders is typically composed entirely of individuals already known to the company – usually drawn from senior management and shareholders. In many respects, this board is hardly distinguishable from any other senior management group. It however provides a good platform to test-run the idea of board recruitment and provide a foundation for future steps towards formal governance. A board of insiders can be a good option for founders that want to transition the business to known individuals, or get the next generation of family owners more closely involved with the company. 

Each of these board types presents different governance profiles that can be adapted to the growth stage of the company and the goals of the founder. 

Rules of effective board recruitment

After deciding which of the board types makes the most sense for your company, the next step is the actual process of board recruitment. Here are key rules of board recruitment to keep in mind: 

  • Recruit the best: Board recruitment should be approached in the same way that you would approach recruitment of senior management or key employees. It is important to populate the board with individuals who offer beneficial attributes in terms of experience, skillset, and diversity. 
  • Look beyond investors: While investors typically lobby for board seats, especially after participating in early funding rounds, be careful about automatically giving in to these demands. Your board should be representative of where you want to go as a company, and it should be populated with individuals that will help achieve this goal, not just occupy board seats to look after the interests of a specific share class.
  • Keep it small: For a first time board, any more than eight directors is probably too much. You should aim for between five to eight directors to ensure a good mix of diverse opinions without overcrowding the boardroom. 
  • Prioritize personal fit: Teams that work well succeed not just because of their unique skills but also due to their chemistry and compatibility. The same principle holds true for board composition. Go beyond just considering the resume of candidates to also determine if they would be a good fit for your board profile.

To address concerns over potential loss of control or clash in authority with the board, it is important to be crystal clear about the extent of the board’s sphere of control. With unequivocal delineation of board authority and decision-making power, usually codified in corporate by-laws, founders can regulate the extent of board involvement in the company’s strategy and operations. 

Colleen Brown is a seasoned CEO and executive director of public companies who has helped boards find diverse executives and board members. She recommends expanding the confines of your search to find those talented candidates who can easily slip under the radar if you don’t know what to look for. “It is important to broaden the scope beyond the traditional CEO and CFO backgrounds by recognizing that the complexity and needs in the boardroom have grown and changed over time,” Brown says. “For example, by considering [candidates with experience in] CMO, CRO, and CHRO positions, the number of diverse candidates [in your pool] can grow significantly.”

Conclusion 

While recruiting a board of directors can feel like a prelude to loss of control or authority over the strategic direction of your company, this is not often the case. Many founders actually look back at the founding of their board as a critical moment in the long-term growth and success of their company, as well as their personal evolution as business leaders. The most important thing is to understand the various ways board types can be adapted to your company profile so you can accurately tell when you’re ready for a board of directors.

The Center for Board Excellence is an excellent resource for corporate governance, producing board assessments and related governance and compliance materials.https://cowenpartners.com/remember-your-abcs-moving-from-theory-to-practice-when-recruiting-for-executive-diversity/embed/#?secret=NJCZghMnP4

Board Recruitment & Executive Search

Board leadership decides the overall strategy and trajectory of your business. Weak leadership in these important positions leads to inefficient management, poor recruitment, and at worse, business failure. For lasting business success, you need to recruit and develop strong board leadership within your company. Companies often struggle with succession planning for their leadership board, though. Board members are too busy handling business needs to search for promising candidates to fill open positions. This is where Cowen Partners board recruitment and succession planning services come into play.

Board Executive Search Firm

Cowen Partners has extensive experience helping businesses build strong board leadership.  From board recruitment and CEO succession planning to identifying director effectiveness, we can help you with any of your executive board search needs. When working with clients, we create a customized experience to find the best board candidates based on a company’s needs. We carefully identify skill sets and backgrounds that would benefit your team as well as determine which candidates align with company values and goals. Our accomplished team also has experience with a wide variety of industries from consumer goods and financial services to healthcare and many others.

No matter what industry you work in, it’s imperative to have a seamless transition when one board member leaves and a new one comes in. A vacant board seat only results in business setbacks and makes it more difficult for the incoming board member to adjust to the role. Stay on top of the recruitment process by hiring an experienced national search firm to fulfill your board recruitment needs. Below are some of the services we offer as well as an explanation of how each one of these services will benefit your company now and in the future.

Board Recruitment Services

When built effectively and run efficiently, corporate boards are a strategic asset and a source of continuous competitive advantage. A board with a portfolio of competencies and intellectual capital aligned with your organization’s toughest strategic and operational challenges will deliver the edge to drive continuous shareholder return.

At Cowen Partners, we know how to locate the candidates who will further your business goals and strengthen your board portfolio even more.

Board Recruitment

With pressure on boards relentless and growing from shareholders, regulators, and the media — expectations are high. Proven top leadership is a powerful strategic asset, and there is no room for error in the selection of directors.

  • Analysis of required board competencies
  • Identify non-conflicting director candidates
  • Establish an appropriate timeline for the search

We work closely with boards to understand strategy, culture, composition, and the skills needed and then partner with our colleagues with deep industry expertise – including diversity, technology, and finance to identify the right candidate.

Cowen Partners Executive Search & Consulting

Cowen Partners is the nation’s executive search firm, enabling companies to harness the power of human capital to fuel their success. Cowen Partners gives our clients access to the top 1% of human capital to create opportunities that accelerate their growth and market share. With Cowen Partners, clients can grow at scale, create value, and drive results with world class talent.

Our clients are both small and large, publicly traded, pre-IPO, private, and non-profit organizations. Clients are typically $50 million to multi-billion dollar revenue Fortune 1000 companies or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite and include VP and Director level leadership roles.

With our proven processes and guaranteed results, we have successfully placed hundreds of candidates in industries including technology, healthcare, manufacturing, retail, financial services, and private equity.

Read more of our industry-leading resources to see why Cowen Partners is a leading retained executive search firm in New York City, Chicago, Seattle, San Francisco, Dallas, Los Angeles, and beyond:

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