A recent Pearl Meyer memo discusses long-term incentive plans and private companies. For many reasons, trying to put a LTIP in place at a private company that offers the same potential benefit as plans provided by public companies can be difficult. For private companies that want to consider implementing a LTIP, the memo lists 7 key LTIP design questions for consideration. The questions are broad and can help illuminate potential paths as well as ‘non-starters’, from a structural perspective:
– What is the company’s vision, exit strategy or transition plan? A potential exit or transition strategy will affect decisions relating to equity vehicles, performance metrics, vesting parameters and liquidity options.
– What is more important to emphasize: performance or retention? The answer can provide clarity about whether appreciation-oriented vehicles or full-value vehicles would be more appropriate.
– Should we share ‘real’ equity with our employees? If potential earnings dilution and administrative headaches are obstacles, the memo discusses some benefits to offering equity-like vehicles, along with some disadvantages.
– Should we provide in-service liquidity? Depending on a company’s strategy, doing so may cause executives to take their eyes off the prize.
– Who should participate in the LTIP? This is probably the most company-specific question and companies need to consider whether all levels of the organization will really value potential future equity above a higher salary today.
– Can we set and track performance metrics and goals? Some companies outsource this process by conducting a periodic third-party valuation, while others establish an internal valuation model, such as a multiple of EBITDA.
– Who has the authority to approve the plan and administer it? With established governance structures less common in private companies, the memo suggests selecting a member of HR and finance to work with the CEO as part of a ‘management committee.’
-Lynn Jokela, CompensationStandards.com September 1, 2020
