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How Pre-IPO Companies Can Hit a Compensation Grand Slam

USA

Transaction activity appears to be on the rise, particularly initial public offerings (IPOs). Companies considering or preparing for an IPO should ensure they are prepared so they are better placed for compensating senior employees and that tax position. Taxand US takes a look at the issue of compensation tax for key executives and employees of multinationals.

Before a company begins setting compensation for its key executives and employees, it needs to scope out the competition. First, it should investigate what levels and types of compensation are going to be competitive, so its compensation structure does what it is supposed to do: incentivise and retain key performers while at the same time maximising shareholder value.

Companies should consider the following:

Develop a peer group of comparable public companies: In benchmarking compensation, a company should generally consider how its peers compensate their executives.

Develop an executive compensation philosophy: Companies should develop a philosophy regarding how they want to compensate their executives relative to market. Many companies may choose to target the 50th percentile, whereas others may target higher levels.

Review competitiveness of and set executive compensation: Competitive levels are typically set by analysing the compensation information for peer companies, using either proxy or survey data, and aligning recommended levels with the company's compensation philosophy.

Analyse application of Code Section 162(m): Generally, no deduction is allowed to any publicly held corporation for compensation in excess of $1 million paid to any covered employee (typically, the principal executive officer and the top three highest-paid executives).

Taxand US provides an analysis of Compensation Tax for pre-IPO companies

Taxand's Take


There are many issues a company should consider when preparing to go public. Boards of directors and compensation committees want to be perceived not as providing excessive compensation packages relative to their peers, but rather as appropriately incentivising and retaining key executives while at the same time maximising shareholder value.

Your Taxand contacts for further queries are:
Brian Cumberland
T. +1 214 438 1013
E. bcumberland@alvarezandmarsal.com

Kandice Bridges
T. +1 214 438 8447
E. kbridges@alvarezandmarsal.com

Taxand's Take Author