In the dynamic landscape of global private equity, Management Incentive Plans (MIPs) are a crucial tool for attracting, retaining and motivating executive talent. In this article, we highlight key issues and practical tips for companies planning to operate MIPs across different jurisdictions.
IDENTIFYING OBJECTIVES
A MIP is a compensation arrangement used to incentivize the management of a privately owned company, often one backed by private equity investors (a "portfolio company"). MIPs can align the interests of management and investors to help drive profitability and stockholder value. Identify why you want a MIP so that you can structure it to deliver the appropriate outcome. This might include giving management "skin in the game" in anticipation of a future sale or listing, facilitating the recruitment and retention of key talent, or utilizing tax-efficient structures locally.
TYPE OF PLAN
There is no single MIP model. MIPs can be equity plans, cash incentive plans or sometimes a combination of both; commonly they track the portfolio company's equity. They can provide long-term or short-term incentives for management. However, it is typical for MIPs to be structured as equity plans designed to realize the value for management when private equity investors sell or otherwise realize their investment in the portfolio company.
LOCAL STRUCTURES
A "one size fits all" approach for a global MIP will often not be possible. Local market practice, local laws (see Regulatory compliance) and tax treatment (see Tax considerations) are among the many factors that will drive the optimal MIP model to choose locally. In Europe and the U.K., for example, "sweet equity" (where a portion of equity is allocated to the management team, often at a nominal cost or at a discount to market value) is a common vehicle, while in the U.S. "profits interest" arrangements are popular as a tax-efficient vehicle.
ADDITIONAL/ALTERNATIVE INCENTIVE TOOLS
MIPs are only one potential tool to incentivize your management team. Other options include annual cash bonus plans, transaction bonuses (instead of exit-based MIPs), phantom equity plans, co-investment programs (enabling management to buy equity in the company at a discount) and carried interest plans (which more commonly arise in the funds of the private equity investors and cover a portfolio of investments rather than a single portfolio company).
WHO WILL PARTICIPATE?
Identify MIP participants and the jurisdictions in which they are based. Typically, participants will include senior management, board members, founders, "early employees" and key employees. Be mindful of local employment laws on fair treatment and non-discrimination when selecting participants and deciding on their award terms. A SINGLE GLOBAL PLAN OR SUB-PLANS? Most commonly, a MIP will be negotiated as a single plan for the global management team but modified for local needs. This approach will facilitate plans being tailored for local compliance, allow flexibility to address local market practices and employee expectations, and allow tax efficient structures to be used locally. Align this arrangement with the company's strategic goals and local requirements.
DOCUMENTATION
Think separately about employment agreements, award letters, plan rules, the shareholders agreement and documents governing any pooling vehicles. Link these carefully, particularly in the context of leaver provisions and vesting rights. Are there mandatory local translation or "wet signature" requirements? Consider translating documents into a participant's native language anyway to evidence that they have understood and accepted the terms.
COMMUNICATION
Develop clear communication strategies to explain the MIP to local participants and ensure they are aligned with its objectives and their own obligations. Check and fulfill any local information and consultation obligations owed to employees or their representatives before introducing or amending the plan. In countries such as Germany and the Netherlands, it may be necessary to seek works council approval (if a company works council has been established) in respect of MIP terms, or proposed changes to terms, if employees participate in the MIP.
PERFORMANCE/VESTING CONDITIONS
Performance and vesting conditions should tie in with the private equity investors' objectives. The vesting of awards can be fully or partially time-based and conditional on a participant's continued employment; vesting can be on a "cliff" basis requiring continued employment at the time of a realization event, or at intervals, such as quarterly or annual dates, or a combination of both. Set clear and measurable financial targets linked to company growth as performance vesting conditions (using metrics such as revenue, EBITDA or gross profit) which participants can easily understand when and if conditions are satisfied.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
