The Advisors' Blog

– Broc Romanek

Here’s a piece from Willis Towers Watson about private companies & LTIPs. Here’s an excerpt:

These are the core LTI-related questions that should be addressed by companies that plan to stay private:

– Is the company willing to use real stock to compensate its executives? If so, securities law (i.e., registration exemption) must be considered. But most private companies, especially family-owned businesses, are not willing to offer such LTIs. Our data indicate that about 80% of these “permanent private” firms do not use real equity in their lLTI programs.

– How important is long-term value creation to the company’s owners? Long-term value creation frequently isn’t paramount to owners who don’t plan to sell in the near future. While value is certainly important, many private companies, notably family- and founder-owned businesses, tend to emphasize consistent long-term growth, profitability, cash flow and dividends over long-term value creation.

– How do business owners define and measure long-term success? When defining and measuring long-term objectives, private companies tend to emphasize growth, profitability, cash flow, sustainability, liquidity and risk level. They may also focus on reinvestment of cash in the business versus paid as dividends to shareholders. Moreover, several studies have shown that private companies are more likely to focus on mission-based objectives related to employees, community, customers and the environment.

– How long is “long term?” Not surprisingly, private businesses tend to think of the long term as 5 to 10 years versus the 2- to 3-year time horizons of public companies. In line with this, private companies are more likely to emphasize loyalty and longevity with regard to employees, customers, suppliers and other stakeholders. This longer-term time horizon is often reflected in LTI design.

– How important is long-term retention of employees and wealth creation? In private companies, LTI often plays a dual role of performance-reward and retirement-funding vehicle, which must be figured into incentive plans.

– How and when will the LTI plan be paid out or monetized? This is particularly important for a value-based plan where there is no market for the stock or phantom stock. In particular, monetization presents thorny tax code issues, including fairly rigid requirements around the timing of vesting and payment.

– Is the LTI plan affordable over the long term? It’s critical to model the LTI plan over at least 5 to 10 years to assess its accounting and cash costs to the enterprise.