Ms. Knab-Hägele, Mr. Kayser, a lot of preparatory work is required for a successful IPO, including the issues of personnel and pay management. Is it only a question of raising the compensation for the executive officers?
Petra Knab-Hägele: Before any IPO in the capital markets, companies should closely examine their remuneration and performance management policies for the executive board, senior management and the general workforce, and review them critically, especially in light of the regulatory framework to which they will be subject.
Joachim Kayser: In addition to the actual figures the structure and details of the remuneration schemes also need to be looked at to make sure they comply with both legal and regulatory requirements for listed companies.
What does that mean exactly in terms of executive pay?
Joachim Kayser: Companies need to look at these questions in relation to this: Do the actual amounts and the structure comply with the regulatory requirements and do they also meet the expectations of new investors? Is the incentive system designed to optimally support realization of the company’s goals?
Petra Knab-Hägele: The remuneration policy must also comply with the provisions of the German Stock Corporation Act and Corporate Governance Code. This means in particular that executive pay must be appropriate in relation to their responsibilities, performance and the company’s position, and the scheme must be competitive. That applies to the target remuneration, paid and the total remuneration. The variable elements of any package in particular should be designed to support a sustainable development of the company.
Which compensation elements need to be looked at more closely?
Joachim Kayser: All of them; starting with the basic salary, short and long-term variable pay and finally the post-employment and fringe benefits. The challenge is to align all elements with each other so that added value is created in real terms and appropriately compensated.
Can the remuneration policy for the executive board be simply transferred to senior management?
Joachim Kayser: To a large extent, yes. But it is certainly worth thinking about which remuneration elements can be applied to senior management for the sake of consistency, and where it makes more sense to make specific changes.
Which are the areas where there must be differences between the two spheres of compensation.
Petra Knab-Hägele: Well, there is the actual variable remuneration and how it is paid. Apart from a few industry-specific exceptions, payments are generally not deferred, as is the norm with executive pay. Then there is the measurement of individual performance based on targets achieved or appraisals. This is often much more specifically embedded in the policies for senior management and supported by relevant performance management processes.
Joachim Kayser: And we must not forget any mandatory self-investment in the company or the allocation of LTI to potential executives. In case of the latter, there is often an issue of consistent identification and definition of the senior management team.
Petra Knab-Hägele: And you must reduce the risk of senior managers being poached. The management board needs to create management and incentive systems which are designed to retain senior managers and support the realization of the company’s strategy.
To what degree can the required changes in remuneration policy you talked about also be applied to the general workforce?
Joachim Kayser: The keyword here is “employee share schemes”. It could be a one-off reward on the occasion of the IPO, or a permanent scheme to increase their stake in the company, pension provision or as an additional source of income.
Petra Knab-Hägele: Giving employees shares in order to retain them should not be underestimated. There are plenty of good schemes that achieved a significant rise in staff identification with the company through equity and profit-sharing packages. Add to that opportunities to invest their own money, which is then matched depending on the level of employee investment, and a high degree of loyalty is the likely outcome for the company, whilst employees reap financial rewards.
Who must take the initiative to get the process of reviewing remuneration policies in preparation for an IPO?
Petra Knab-Hägele: The traditional areas of responsibility: Executive pay is the responsibility of the supervisory board. They should take action as early as possible to make sure that all pertinent issues have been discussed, resolved and agreed with those involved before the prospectus is produced. The executive board is responsible for the remuneration of senior management and the general workforce.
How long do these preparations take?
Joachim Kayser: Our experience tells us that you should plan for at least three to six months. Enough time needs to be scheduled afterwards to review the remuneration policies for senior management and the general workforce.
hkp/// is supporting a number of companies with their IPO this year. How do these benefit from involving an external remuneration expert?
Joachim Kayser: This is a very specific, often once-in-a-lifetime occasion with a multitude of possible solutions, and resources are very limited in such situations. It therefore makes economic sense to get specialists on board who know everything there is to know about pay management, especially if you are preparing for an IPO.
Petra Knab-Hägele: A holistic view of the various issues is also important. It depends on the specific situation, but just turning a little screw here or there simply won’t cut it in most cases. Viable solutions often only emerge when you look at the whole picture and will prepare the company’s remuneration policy for its new position as a listed entity.
Ms. Knab-Hägele, Mr. Kayser, many thanks for this interview.