Page 36 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

22 The Complete Guide to Executive Compensation

Changes in Lifecycle Stages
In any of the four stages, there are five possible events: remain, advance, sellout, turnaround,
and bankruptcy. These are illustrated in Table 1-12 along with probability values. The latter
are best viewed not in absolute terms but relative to each other. For example, in the thresh-
old stage, bankruptcy is probably the most likely occurrence—a large percentage of start-ups
fail. Advancing (or selling out to someone else) is also probably more likely to occur in the
threshold stage than remaining put.

Probability of Action
Action Threshold Growth Maturity Decline

Remain Low Low Low Low
Advance Moderate High High None

Sellout Moderate Low Moderate High
Turnaround — Low Moderate Moderate

Bankruptcy High Low Moderate High

Table 1-12. Action probabilities in various market lifecycles

Company Size
Although companies tend to grow larger as they move from threshold to later stages of devel-
opment, that does not mean all companies become large. Some will remain small; other will
become only moderate in size. One way to categorize company size is by sales (revenue);
another way is by size of market capitalization. Regardless, while there would be differences
in emphasis on each of the five pay elements based on absolute size of the company,
differences are more likely to be influenced by stage in the market cycle. However, there are
ways to dramatically increase or decrease a company’s size. These will be reviewed next.

Organizational Structure Change

Virtually all companies begin as start-ups with the founders financing the capital needs of
the company by taking out loans and mortgages as necessary. The next stage is when venture
capitalists are willing to put up money for an equity position in the company. By now, the
founders have given themselves large stock option grants, hoping for a run-up in price when
the stock goes public. However, care must be taken in the timing and grand price of stock
options prior to the initial public offering (IPO). For example, the auditors may conclude that
an option at $1 one month before an IPO offering at $20 should be ruled as “cheap stock,”
namely, that the $1 grant is significantly underpriced. This may result in a charge to the
earnings statement for all (or a portion) of the difference. This restatement of the earning
statement will also affect an S-1 SEC filing. However, these stocks cannot be sold for a
stated period of time after an (IPO)—typically 180 days. This is called a lockup period. It can
be expected that when the lockup period expires there will be considerable downward
pressure on the stock price due to sales. Later, a company may decide to acquire or merge