Competing for Talent Across the Private vs. Public Divide · Source: April 2014 publication of the Radford US Pre-IPO/Venture-Backed Survey Equity ownership declines relative to early-stage

Competing for Talent

Across the Private vs.

Public Divide

Featuring:

Ted Buyniski Radford

Kyle Holm Radford

Ken Wechsler Radford

1 #radfordimpact14 Radford IMPACT 14 Conference.

© 2014 Aon Corporation. All rights reserved.

Session Agenda

Introductions

Setting the stage

Understanding compensation, pay mix, recruiting propositions and pain points by stage of development:

Early-stage

IPO-ready

Newly-public

Established public

Private (not going public)

Private vs. public pay practices summary



Different Needs, Different Strategies

All companies need talented people, but they can adopt very different strategies to secure that talent

At various stages, companies will have:

Different competitive advantages

Different risk profiles

Different horizons

Different human capital needs

Early-Stage

IPO-Ready

Newly-Public

Established Public

Private (Not Going

Public)



What Defines Early-Stage Companies?

Early-Stage Technology Life

Sciences

Total Outside Investment ~$20M ~$28M

Rounds of Financing 1 to 2 1 to 3

Last Fiscal Year Revenue ~$9M n/a

Number of Employees ~50 ~20

Years Since Founding 5 Years 6 Years

Equity Plan Usage Technology Life

Sciences

Executive Ownership 26% 9%

Other Employee Ownership 6% 3%

Total Employee Ownership 32% 12%

Total Overhang 38% 18%

Equity Vehicle 100% Options 100% Options

2000

2014

2009

Source: April 2014 publication of the Radford US Pre-IPO/Venture-Backed Survey



Pay Profiles for Early-Stage Companies

Employee Level Base Salary

Target Incentive Target Total

Cash

Ownership

% % of Base Value

Technology Early-Stage Compensation (50th Percentile)

CEO (Non-Founder) $287.5 40% $115.0 $402.5 4.840%

CFO $235.0 20% $47.0 $282.0 0.981%

Management 3 $115.0 10% $11.5 $126.5 0.035%

Professional 3 $95.00 10% $9.50 $104.5 0.031%

Support 3 $44.30 5% $2.20 $46.60 0.003%

Life Sciences Early-Stage Compensation (50th Percentile)

CEO (Non-Founder) $333.6 40% $133.5 $467.1 3.868%

CFO $230.0 35% $80.5 $310.5 0.980%

Management 3 $130.0 15% $19.5 $149.5 0.032%

Professional 3 $84.00 8% $6.70 $90.70 0.039%

Support 3 $48.70 0% $0.00 $48.70 0.013%


Early-stage compensation levels show an emphasis on equity throughout the organization, with moderate cash incentives



Pay Mix at Early-Stage Companies

71% 74%

87% 93%

100%

29% 26%

13% 7%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3

Life Sciences Sector

Base Salary Bonus

71%

83% 91% 91% 95%

29%

17% 9% 9% 5%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3

Technology Sector

Base Salary Bonus




Early-Stage Company Snapshot

The

Objective Attraction

Pay

Low to medium cash/fixed pay, medium (if any) short-term incentive pay, high

long-term incentives (as a percent of company)

Board of Director compensation is non-existent or limited to initial equity

Selling

Points

“Lottery ticket” mentality; the potential to win big if successful

The chance to be part of something innovative (intrinsic rewards)

Career growth via ground floor opportunities

Pain

Points

Cash flow issues and lack of certainty (i.e. job security)

Informal pay practices, which means employees get what they negotiate

As the company grows, informal salary increases and performance

management systems can be less effective



What Defines IPO-Ready Companies?

IPO-Ready Technology Life

Sciences

Total Outside Investment ~$110M ~$70M

Rounds of Financing 4 to 5 4 to 5+

Last Fiscal Year Revenue ~$50M n/a

Number of Employees ~250 ~40

Years Since Founding 8 8


Sciences

Executive Ownership 15% 11%

Other Employee Ownership 5% 2%

Total Employee Ownership 20% 14%


Equity Vehicle 85% options only 95% options only




Pay Profiles for IPO-Ready Companies


Equity ownership declines relative to early-stage firms; total cash is lower for execs, but closer to public levels for other employees



Cash

Ownership

% % of Base Value

Technology IPO-Ready Compensation (50th Percentile)

CEO (Non-Founder) $300.0 50% $150.0 $450.0 4.448%

CFO $257.5 33% $85.0 $342.5 0.880%

Management 3 $121.1 10% $12.1 $133.2 0.020%

Professional 3 $98.20 10% $9.80 $108.0 0.010%

Support 3 $45.00 5% $2.30 $47.30 0.001%

Life Sciences IPO-Ready Compensation (50th Percentile)

CEO (Non-Founder) $375.0 40% $150.0 $525.0 4.050%

CFO $270.0 30% $81.0 $351.0 0.814%

Management 3 $136.4 13% $17.7 $154.1 0.051%

Professional 3 $78.00 8% $6.20 $84.20 0.014%

Support 3 $50.90 6% $3.10 $53.90 0.005%



Pay Mix at IPO-Ready Companies

71% 77%

88% 93% 94%

29% 23%

12% 7% 6%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3


Base Salary Bonus

67% 75%

91% 91% 95%

33% 25%

9% 9% 5%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3

Technology Sector

Base Salary Bonus




IPO-Ready Company Snapshot

The

Objective

Liquidity; there is now real potential to realize significant value through equity

Lock down key talent to drive future growth

Pay

Transitional pay; cash compensation rises, formal annual incentives arrive, and

significantly-reduced long-term incentive awards are introduced

Board of Director compensation program must be created in anticipation of an

IPO and the hiring of independent Board members

Selling

Points

This is your last chance to “cash in”

Legitimacy mentality; we made it

Resume enhancer

Pain

Points

Need to prepare for public and investor scrutiny

Significant systems implementation

Past inequities within the company will likely come to the surface



Long-Term Incentive Plan Evolution

Long-Term Incentive Vehicles

Company Profile

Objectives and Implications Startup/ Pre-IPO

Mid-Cap/ Growth Market

Mid-Cap/ Mature Market

Large Cap/ Mature Market

Stock Options Only Stock options help employees focus on

upside potential, either stock price growth or company valuation growth

Restricted Shares/ Units Only

Restricted shares/units de-emphasize stock price growth in favor of employee retention and ownership

Stock Options and Restricted Shares/ Units

A mixed approach attempts to balance growth with retention, and typically involves different mixes for different employee levels

Performance Shares/ Units

Performance shares allow companies to introduce targeted goals (beyond stock price growth) into their equity programs

Long-Term Cash

Often used in conjunction with equity, long-term cash allows for more diversity of performance goals, but requires an ability to set goals over multiple years

Relative Total Shareholder Return

The use of TSR metrics typically reflects alignment with the institutional investor perspective (i.e., portfolio performance) and requires a stable peer group

Emerging Practice Least Common Practice Most Common Practice



What Defines Newly-Public Companies?

Newly-Public Technology Life

Sciences

IPO Proceeds $84MM $65MM

% Float 16% 30%

Last Fiscal Year Revenue $104MM $3MM

Number of Employees 469 47

Years Since Founding 10 8


Sciences

New Equity Incentive Plan 91% 93%

Evergreen Prevalence 68% 74%

ESPP 41% 51%

Issued Overhang 15% 10%


2014

2014

2013

Source: Radford proprietary research of recently public companies



Pay Profiles for Newly-Public Companies



Cash

Total Direct

Pay % of Base Value

Technology Newly-Public Compensation (50th Percentile)

CEO (Non-Founder) $350.0 58.3% $204.0 $554.0 $1,380.0

CFO $285.0 30.8% $87.80 $372.8 $917.8

Management 3 $117.4 11.8% $13.80 $131.2 $146.2

Professional 3 $91.50 7.7% $7.000 $98.50 $107.1

Support 3 $49.10 4.8% $2.40 $51.50 $52.70

Life Sciences Newly-Public Compensation (50th Percentile)

CEO (Non-Founder) $416.6 40.0% $166.6 $583.3 $1,565.8

CFO $283.5 30.0% $85.1 $368.6 $677.2

Management 3 $132.8 9.4% $12.5 $145.3 $179.3

Professional 3 $95.00 6.2% $5.80 $100.8 $113.2

Support 3 $57.90 5.1% $3.00 $60.90 $65.40

Source: January 2014 publications of the Radford Global Technology and Global Life Sciences Surveys

Total direct pay now includes long-term incentive values that are delivered in dollar values and less frequently as a percent of company



Pay Mix at Newly-Public Companies

27%

42%

74% 84% 88%

11%

13%

7%

5% 5%

62%

45%

19% 11% 7%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3


Base Salary Bonus Long-Term Incentives

25% 31%

80% 85%

93%

15% 10%

10% 7%

4%

60% 59%

10% 8% 3%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3

Technology Sector





Newly-Public Company Snapshot

The

Objective

Manage rapid growth

Retention

Develop a formal pay philosophy and competitive compensation programs

Pay

Medium pay all around, including cash/fixed pay, short-term incentives and

long-term incentives

Board of Director pay is positioned at the lower percentiles of the market

Selling

Points

Growth opportunities with structure

Competitive compensation

Transition to annual equity grants

Pain

Points

Potential for internal pay equity issues between pre- and post-IPO employees

Changing pay policies and performance mgmt. system as the company matures

New obligation to respond to shareholders



Established Public Companies



Pay Profiles for Established Companies



Cash

Total Direct

Pay % of Base Value

Technology Established Company Compensation (50th Percentile)

CEO (Non-Founder) $1,000.0 150.0% $1,500.0 $2,500.0 $8,967.4

CFO $585.3 100.0% $585.3 $1,170.6 $3,026.0

Management 3 $121.2 12.0% $13.30 $134.5 $154.80

Professional 3 $96.30 9.0% $7.80 $104.0 $114.90

Support 3 $53.90 5.0% $2.20 $56.1 $57.100

Life Sciences Established Company Compensation (50th Percentile)

CEO (Non-Founder) $800.0 100.0% $800.0 $1,600.0 $6,368.7

CFO $435.0 50.0% $217.5 $652.5 $1,992.2

Management 3 $145.4 18.0% $26.2 $171.5 $202.40

Professional 3 $96.00 9.0% $8.60 $104.6 $118.80

Support 3 $53.50 5.0% $2.70 $56.20 $62.200


Long-term incentive values at the executive level become meaningful as the company market capitalization values increase



Pay Mix at Established Public Companies

13% 22%

72% 81%

86%

13%

11%

13%

7% 4%

74% 67%

15% 12% 10%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3



11% 19%

77% 82%

93%

17%

19%

9% 8%

5%

72% 62%

14% 10% 2%

0%

20%

40%

60%

80%

100%

CEO (≠ Founder)

CFO Mgmt.Level 3

Prof.Level 3

SupportLevel 3

Technology Sector





Established Company Snapshot

The

Objective

Manage steady growth

Maintain profitability and cost management

Retention

Pay

Medium to high cash/fixed pay, high short-term incentive pay, and low long-term

incentives

Highly competitive Board of Director compensation

Selling

Points

Certainty and stability

Quality, professional career development

Infrastructure

Pain

Points

Competition from start-ups

Slow and low growth

Reduced upside opportunities



Private Companies (Not Going Public)



Private (Not Going Public) Snapshot

The

Objective

Long-time private company objectives: steady annual growth without undue

public market influence or pressure

Private equity objectives: improved cash flow, reorganization and/or new

strategy and catalyzing growth

Pay High cash/fixed pay (salary and incentives)

Little to no equity; equity is only used as an extremely long-term opportunity

Selling

Points

Company has more autonomy in decision-making, program design

Employees get relatively more cash and benefits

Unique culture (sometimes family driven)

Pain

Points

Little to no equity

Slower growth, which may mean less opportunity for employee growth

Lack of external accountability may result in “not invented here” syndrome



Private vs. Public Pay Practices Summary



Private vs. Public Practices

Typical Private Firm Typical Public Firm

Peer Group

Development

Usually, no specific identified peer list

Focus is placed on comparative

companies similar in size and stage

of development

Key metrics include industry, invested

capital, revenue, stage of

development and employee count

Usually, a specific group of 15 to 20

identified public peer companies

Technology: focus is often on revenue

and market cap

Life sciences: focus is often on

market cap, R&D spend, product

phase/stage

Cash Approach

Base salary must be competitive (no

longer getting away with low cash)

Annual bonuses a “definite maybe”

these days

Base salary: 50th percentile

Annual bonus: 50th percentile or

above, emphasizing the at-risk nature

of compensation



Private vs. Public Practices (Cont.)


Equity Approach

Aggressive award sizes, especially to

those risking early entry

Vehicles: Stock options dominate

Award sizing metric: Ownership

percentage

50th percentile and up to 75th based

on performance

Vehicles: Options, RSUs,

performance shares

Award sizing metric: Value

Pay-for-

Performance Egalitarian: “we’re all in this together”

Pay is targeted to key roles and high

performers





Equity Award

Sizing

Primarily established by targeting

specific ownership percentages;

conversion into shares based on total

common shares outstanding

Primarily established by targeting

specific values; conversion into

shares is typically based on stock

price

New-Hire vs.

Ongoing Awards

Large new-hire grants

Ongoing grants delayed until IPO

approaches, or 3-4 years after hire

Ongoing guidelines set anywhere

from 25% to 33% of new-hire awards

New-hire awards are typically 2x

ongoing award sizes

Most employees are eligible for

ongoing awards after one year of

service





Equity Vehicle

Mix

Stock options dominate

Caveat: A few notable companies

have used RSUs pre-IPO; however,

large cash reserves are needed to

address taxes

Mix of stock options and RSUs, with

an emphasis on RSUs as the firm

matures

Rising prevalence of performance

shares for executives

Equity Program

Participation

New hire awards: nearly 100%

Ongoing awards: targeted at key

performers and those employees

greater than 50% vested (usually

25% to 30% of population at any

given time)

New hire awards: participation drops

as companies increases in size

Ongoing awards: broad eligibility is

maintained, although awards targeted

at top performers (usually 40% to

60% of population at any given time)



Competing For Talent At Every Stage

Understanding the desires, risk profile and “pain points” of your candidates/employees is key the to successful recruiting and retention

Early-Stage IPO-Ready Newly-Public

Established

Public

Private (Not

Going Public)

Recruiting

Sell the full

opportunity

Early equity

upside

Ground-floor

career growth

Realizable

equity value is

just around the

corner

Rapid growth

with systems

More stability

Annual equity

grants

Formal bonus

and benefit

plans

Broadly

competitive

total rewards

package

Strong cash

programs

Above-market

cash/bonus

programs

Limited equity

(if available)

has long-term

value

Retention

Resell the full

opportunity

Grant more

high-potential

equity

Promote

Vested and

unvested

equity has

significant

value

Rising cash

compensation

Establish

annual equity

Significantly

reduced risk

Competitive

pay packages

Professional

training

Wealth

creation

Leverage high

above-market

cash

Establish

unique reward

porgrams

Thank You!

Questions?

Documents

Competing for Talent Across the Private vs. Public Divide · Source: April 2014 publication of the Radford US Pre-IPO/Venture-Backed Survey Equity ownership declines relative to early-stage