In anticipation of a revival in AIM IPOs, it’s important to get remuneration policy right from the start

As they say in the movies, this is based on a true story.

The business had been through a number of transformations before emerging into private equity hands. It was floated on AIM, in something of a hurry, principally to pay down debt. The private equity house retained a stake in the business post-float. During the IPO process, no thought was given to executive remuneration. No management incentives or employee share plans were put in place. Now, several months down the line, the question is: what can be done to make up for lost time?

This story-line is not unique. We have seen a number of similar examples.

Executive pay is a tricky area, which can easily be forgotten in the rush to come to market. An IPO is an opportunity to reward the past and to create the right conditions to make the most of and reward the future. But, if remuneration is not given attention until after the event, that opportunity might be lost on both counts. Delay risks:

• not being able, post-IPO, to remunerate management and staff as expected (or promised)
• management and staff being less than fully focused and motivated, as a result, leaving the business vulnerable
• performance and investor returns not meeting expectations.

AIM has had a quiet couple of years. According to London Stock Exchange data, there were over 40 AIM IPOs in 2018. In 2019 and 2020, combined, there were less than 30. This year, London’s junior market is reported to be expecting an increase in the number of IPOs, on the back of a surge in the number of technology-based growth companies in the healthcare and sustainable energy sectors and in anticipation of the end of pandemic-related lockdown.

Our experience is that the post-IPO business is likely to be very different from its pre-IPO incarnation. Some of the most significant differences may include all or some of the following:

• corporate governance framework
• new investors with differing aspirations
• the need to engage with investors
• greater scrutiny of activities, remuneration and performance from all stakeholders
• disclosure requirements
• non-executive directors.

A challenge for some growth companies, which have a continuing requirement for development capital and whose management might not have received market competitive levels of remuneration for several years, is how to compensate management for those lean years.  Investors will want a skilled management team to be locked-in and focused on delivering sustainable returns. They will not want to see a significant portion of their injected capital disappearing in executive pay to compensate for the past.

An IPO creates liquidity and the ability to trade shares. Using shares as part of remuneration policy, therefore, becomes potentially more attractive. But some of the valuations placed on, particularly, sustainable energy stocks are high and may not themselves be sustainable, which makes it imperative to take care over the design of equity-based incentives for management and staff.

The remuneration of non-executive directors is also attracting greater interest. Clients seeking to appoint non-executives, possibly from overseas, with particular skills and with a brief to do much more in the period post-IPO than might typically be expected of a non-executive director, are asking how best to address their remuneration. Candidates having an established reputation and skills in a relevant field may not be prepared to join for a standard UK NED fee.

This piece argues that directors’ and executives’ remuneration should be given full consideration as part of the IPO process and explores some of the challenges, which we see facing companies planning an IPO on AIM. To discuss any of the points raised, please contact Paul Norris.

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