Preparing For The Public Markets: When And How To Engage A Compensation Consultant

For companies preparing to enter the public markets through an initial public offering (IPO), direct listing, or special purpose acquisition company (SPAC) business combination, executive and director compensation decisions often become public-facing before management teams fully appreciate the scrutiny those decisions will receive. A compensation program that worked well for a private company can look very different once it is evaluated by institutional investors, proxy advisory firms, and the SEC’s disclosure regime. For that reason, engaging a qualified compensation consultant early in the go-public process is essential.

Neither the New York Stock Exchange nor Nasdaq listing standards require that a compensation advisor be independent; they require the compensation committee to consider specified independence factors (including fees, business and personal relationships, stock ownership, and other potential conflicts) before selecting or receiving advice from a compensation advisor. Rule 10C‑1 under the Securities Exchange Act (implementing Dodd–Frank section 952) required the exchanges to adopt listing standards addressing compensation-committee authority, funding, advisor-independence considerations, and responsibility for the appointment, compensation, and oversight of advisors. Item 407(e) of Regulation S‑K requires disclosure regarding the role of any compensation consultant and, if the consultant’s work raises a conflict of interest, disclosure of the nature of the conflict and how it was addressed. Newly public companies will also face their first say-on-pay advisory vote within one to three years, so designing compensation programs that can withstand proxy advisory firm scrutiny matters from the start. The consultant typically reports directly to the compensation committee.

The ideal time to engage a compensation consultant is during the early stages of preparing for a go-public transaction, typically six to 12 months before the anticipated offering or closing. The engagement should begin before the company has finalized its S‑1 registration statement compensation disclosure, equity incentive plan design, public company peer group, and director compensation program. This timing allows the consultant to conduct a comprehensive review of the company’s existing compensation arrangements, benchmark executive and director pay against peer companies, and recommend adjustments to equity-incentive plans that reflect public-company norms. Early engagement also ensures that the compensation committee has adequate time to implement changes, such as adopting a new equity plan or restructuring employment agreements.

For SPAC business combinations and direct listings, the timeline is compressed. In a de‑SPAC transaction, the compensation committee may need to complete benchmarking, finalize equity plan design, and secure board approvals within 60 to 90 days. Engaging a consultant at the letter-of-intent stage (even before a definitive agreement is signed) is advisable.

Our executive compensation team regularly advises companies and compensation committees through the full arc of the consultant engagement and IPO compensation design process. While the consultant provides market data and design recommendations, we help ensure that those recommendations are integrated with the company’s securities disclosure, equity plan approvals, compensation committee charter, director independence analysis, and broader public company readiness planning. We work alongside experienced compensation consulting firms and can recommend consultants whose experience and independence profile match your company’s situation.

A well-crafted Request for Proposal (RFP) should address independence conflicts arising from other services that the consultant or its firm provides to the company or management; specific experience with IPOs, SPACs, or direct listings for companies of comparable size and sector; the identity of the lead consultant who will perform the work; the consultant’s proposed approach to the review and benchmarking analysis, including peer group selection methodology; the scope of engagement (executive and director benchmarking, equity plan design, share reserve analysis); the consultant’s ability to present recommendations and insights effectively to senior executives and the board; a sample workplan and timeline; fee structure; and references. Price matters, but evaluate it last.

The consultant’s engagement should cover: development of a public company peer group appropriate for the company’s anticipated market capitalization, revenue, and sector; benchmarking of executive officer and non-employee director compensation against that peer group; equity incentive plan design, including share reserve sizing and burn-rate modeling; review of existing employment, severance, and change-in-control arrangements; IPO equity grant strategy; and development of a compensation committee calendar and governance framework. The consultant should also support S‑1 and proxy statement compensation disclosure.

Companies that wait until the S‑1 registration statement is in draft often find that there is no time to restructure employment agreements, reprice equity awards, or reconsider a peer group that does not hold up under scrutiny. A consultant engaged by management (rather than reporting directly to the compensation committee) may raise actual or perceived independence concerns and is often viewed less favorably by proxy advisory firms, including Institutional Shareholder Services (ISS) and Glass Lewis. Peer groups that are too large, too narrow, or populated with companies that differ materially in size or business model invite proxy advisory firm challenges in the company’s first year as a public company. And an equity plan share reserve sized without burn-rate and overhang analysis may generate an “Against” recommendation on the equity-plan proposal at the first annual meeting.

If your company is preparing for a go-public transaction in the next 12 to 18 months, now is the right time to begin thinking about executive compensation. Our team can help you identify the right consultant, structure the engagement, and design a compensation program that supports talent retention and investor confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.