The Choice, Design and Strategic Implications of Executive Incentive Pay Schemes at the Time of an Initial Public Offering: A UK Perspective

Abstract

This paper presents a critical analysis of the choice and design of executive pay incentive scheme arrangements implemented at the time of a company's initial public offering. Using a unique sample of 311 entrepreneurial companies over a five year period (1998–2002) it discovers that 172 companies implement executive share option schemes for the first time at their initial public offering. Taking this sub-sample, the paper evaluates and analyses the strategic choices made with regard to incentive pay schemes by the board of directors at this crucial time in a company's development. It finds that company's choices are split between schemes that have performance targets linked to reward and others that are contrary to the guidelines of the UK's Corporate Governance Code and best practice. Furthermore, it shows company characteristics that affect schemes and elaborates on the configuration of incentive schemes in respect of three critical elements: the performance target, comparator, and target level requirement for the shares to vest. In light of this, it proposes strategic reasons as to how these schemes might be set for initial public offerings and proposes that explanations for implementation are not underpinned by traditional agency theory but linked to a resource based view of the firm.