For companies considering an initial public offering (IPO), one of the most critical items to address is the establishment of a long-term incentive (LTI) plan strategy and share reserve for post-IPO equity awards. WTW’s Global Executive Compensation Analysis Team (GECAT) researched the LTI practices of 98 U.S.-based IPOs since 2022 with $100 million market capitalization or higher.
Through this work, we gained insights on key statistics and first-year equity award trends, including that a company’s LTI plan must address four primary issues at the time of its IPO.
The maximum share replenishment ranged from 1% to 10% of CSO, with a median of 5%. Seventy percent of companies that have an evergreen set their maximum at 5% of CSO (Table 2).
Evergreens have become much more prevalent in IPO equity-plan designs in recent years. This is likely due to changes in U.S. income tax law, and the increase in the number of companies that completed their public offerings through a “de-SPAC process” (i.e., a merger with an already-public Special Purpose Acquisition Company) where evergreens are historically more common.
With that said, evergreen provisions are viewed as generally unfriendly to shareholders by major proxy advisors. Therefore, they typically are removed as a feature when:
- A future material modification to the equity plan requires shareholder approval;
- A company seeks additional equity plan shares to award employees, directors and other service providers; or
- The current equity plan expires
This 4.5% median is substantially higher than prior analyses we conducted on IPO equity grant practices. This increase may be linked to the emergence of evergreens as a common plan feature; if companies know they can replenish their available share pool by up to 5% at the conclusion of their first year, the 5% figure may serve as a de-facto budget for IPO year share awards.
With that said, we believe that newly public companies should not see the evergreen limit as an annual “budget.” Rather, they should grant equity awards in a way that is long-term sustainable, aligned with shareholder interests and competitive with the external market for executive table.
About one-half of all IPO companies granted only one form of equity in the IPO year, with stock options (27% of companies) slightly outpacing RSUs (22%). When companies granted more than one equity vehicle, the most common combination was stock options and RSUs (Figure 3).
The role of equity vehicles in IPOs
After several years of a post-SPAC slowdown in the number of IPOs, analysts expect interest in going public to rebound in the latter half of 2025 and early 2026. A robust equity plan should be a critical part of these companies’ post-IPO compensation strategies.
The share reserve established in these plans should be used thoughtfully and as part of a total compensation package that aligns interests of equity plan participants, particularly executives, with the company’s new shareholders.
With that said, equity grant practices in the first year that a company is publicly traded often have goals that are specific to that first year: Key employee alignment, retention and ownership are most commonly cited as the company’s primary objectives. After the IPO year, a reduced dilution rate and an introduction of PSUs in the equity mix may be advisable.
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