Private equity investors (PEIs) when investing
in new portfolio companies, seek to align management's
interests with that of the PEI to grow the value of the portfolio
company and achieve a profitable return in the investment upon
Typically, PEIs incentivize management to adopt such interests
through compensation arrangements in the form of performance
incentives. Generally, PEIs will grant management an interest in
the growth in value of the company via an interest in the equity of
the company (e.g., stock options or performance shares) or
in the profit/proceeds of the company, the latter of which is
typically used for partnerships.
Notwithstanding that specifics naturally differ across all PEIs,
there are some common elements in the amount and vesting among
performance incentives. PricewaterhouseCoopers published a survey (the Survey) and a report (the Report) in 2013
and 2012, respectively, outlining such information which is
Amount and participation
Determining the right percentage of interest in a portfolio
company (or profit/proceeds) to be granted to sufficiently
incentivize management is a fact-specific question. Generally, PEIs
first determine the total compensation they wish to provide
management upon a successful exit then "back-solve" for
the amount and form of equity required to deliver that dollar
amount. Further, both the Survey and the Report note that:
on average, PEIs reserve
approximately 10% of the equity interest for management incentive
plans (as a percentage of fully diluted shares) with a range of
4.5% to 17%; and
on average, the CEO and next four
senior-most executives receive approximately 50% of this
Notably, PEIs also typically tie different percentages to
different performance achievements. For example, escalating
percentages (e.g., 5%, 10%) can reflect different tiers,
each tied to an escalating performance (or hurdle) rate.
Performance incentives are typically subject to vesting
conditions. While some performance incentives are time vesting, the
Report states that the following two vesting conditions are the
most commonly used:
performance based vesting conditions
based on metrics related to achieving financial targets
(e.g., EBITDA); or
exit based vesting conditions based
on metrics such as the internal rate of return or a multiple of
invested capital achieved upon a liquidity event.
PEIs may impose additional terms which may cause a person to
forfeit their entitlement to any performance incentives upon the
occurrence of certain events, such as that person's resignation
The author would like to thank Nader Hasan, articling
student, for his assistance in preparing this legal
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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