The Advisors' Blog

– Lynn Jokela

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.’