How to use share equity to retain people during an IPO 

An initial public offering (IPO) can be an exciting once-in-a-lifetime opportunity for employees to gain a stake in the company they’ve worked hard to build. 

However, the work involved to execute such an endeavour can be taxing on those expected to support the transition. Often times, IPOs can generate an uptick in resignations for a whole host of reasons. Regardless of an employee’s motivation behind a resignation, it’s important to think about your people retention strategy and how to entice and reward employees with an equity opportunity. 

“Deciding who is and who isn’t eligible for shares in and IPO is a tricky business,” explains Scott Gardiner, a Senior Principal in Mercer’s Global HR M&A Advisory services. “Some organisations choose to allocate shares only to very senior leaders, which comes with the risk of alienating others in the organisation. Especially, in instances where those folks are asked to support the transition. Other organisations opt to “spread the wealth” and reward a larger population.” 

He adds, “When deciding on the reward strategy, it’s important to look at all the ways you can make employees feel part of the IPO, instead of it being something that’s just happening to them. Deciding who to offer equity to has a vital role to play, but this must sit alongside a wider reward strategy. Not everyone is motivated simply just by money. Therefore, organisations would be wise to look at a comprehensive engagement strategy in light of the fundamental changes in the organisation once it goes public.” 

With so much to think about when it comes to using share equity to retain people during an IPO, here are three key points to consider.

  1. Who should you give shares to?

    It’s important to think about the consequences of people feeling left out, warns Scott: “It’s okay not to give everyone equity, but it’s important to be very clear and consistent about who is, and isn’t, being included and why. An IPO is a unique opportunity to celebrate the people who were asked to continue doing their “day job,” while also supporting the IPO. Allocating some of the equity pool, beyond senior leadership, can be hugely impactful in retaining and engaging employees.”

    It's vital to have an overall philosophy to guide your strategy, especially when it comes to using equity to retain your most valued employees. “You can design your equity plans to incentivise longer-term commitment from employees through partial annual vesting, which is the industry practice,” says Scott. “Think about your talent pipeline and how you want to use equity to retain the skills needed for future success. The most critical talent, roles and skills, for the future success of the organisation, should factor heavily into the distribution strategy.” 

  2. How can you stop people leaving?

    Shares in the business alone will not be enough to retain people in the long-term. “The promise of shares is a vehicle to buy someone’s patience,” says Scott. “You can dangle the promise of a reward as an incentive for employees. However, typically a financial reward or retention incentive only buys the organisation time. If the value proposition of the new environment doesn’t meet employees’ expectations some will still leave before or just after collecting their compensation.” 

    He adds, “Good communication is essential in ensuring the organisation’s strategy for going IPO is clear. What are the impacts on the organisation post IPO? What has changed and what are the new expectations of folks now that they work in a publicly traded company. Things will change and employees need to know that so they are not caught off-guard. Open and honest communication can go a long way, even if they are not happy with how it impacts them.” 

  3. How can you use equity to reward people?

    For some, equity is perceived as being just as valuable as a cash bonus. Understanding how your employee population is motivated will allow an organisation to most effectively use their equity allocation. “Many organisations will re-examine their incentive compensation strategy in an effort to blend annual bonus and equity. An equity event doesn’t even need to result in a larger target for employees. Consider shifting a percentage of the total annual bonus to equity as a way to incent retention without impacting their annual compensation,” explains Scott. 

    It’s also important to review the overall rewards strategy and factor in the extra complexity that layering in equity and becoming a publicly traded company presents. Bonus allocation pools are now more heavily scrutinized by an independent board and even large investors, says Scott. 

    All these decisions will have implications on how people feel about working for a newly publicly traded company vs. a private organisation. IPO events can be exciting, exhausting and impactful to an organisation. Scott says, “IPOs are riddled with people pitfalls and unintended consequences. It’s important to not lose sight of the employee’s perspective in this pivotal event. After all, without your employees an IPO would not even be possible.” 

Want help to create your equity reward and retention strategy? Our dedicated M&A professionals are eager to help. Our HR experts are available to advise all aspects of your IPO reward and retention strategy and execution. 
Think about your talent pipeline and how you want to use equity to retain the skills needed for future success. The most critical talent, roles and skills, for the future success of the organisation, should factor heavily into the distribution strategy.
Scott Gardiner

Senior Principal HR M&A & Transformation Advisory, US

Scott Gardiner
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