Value-sharing programs can be essential for ensuring sustainability of management teams, providing executive compensation and for capital structure and exit planning at private companies. Recently released research and analysis by Mark Bronfman at Sagemark Consulting (see www.BOLDValue.com) focuses on optimizing value-sharing initiatives leading up to a change in control, and the data is rather insightful.
According to the study, long-term value-sharing programs are often the single largest investment a company will make, which is why “proper design, sizing, communication and administration of these programs is essential.” If you’re a member of the executive team at a middle market private company that’s looking to implement your own value-sharing program, you may be wondering exactly how much equity should be shared via the program. The BOLD Value team identified four findings when it comes to program size in larger, middle market companies (companies valued at over $100M). These finding show:
- Private companies with value-sharing plans carve out about 11% of the company equity value on a weighted average basis, either as equity-denominated long-term incentive pools or as change in control business.
- Value sharing may be denominated in both equity (restricted stock grants, stock options, etc.) and synthetic equity programs (phantom stock, liability SARs, etc.)
- At smaller companies (valuation of $20M or less), we often see value sharing plans in the range of 15% to 25% or higher for key management, typically rewarding long tenure and highly sought-after capabilities.
- This 11% includes value sharing for the entire core management team. If the CEO is also an outright material owner, the value sharing is less (perhaps around 2% less).
- Value-sharing plans show a very high variance among private companies. A survey data published in January 2012 by WorldatWork/Vivient illustrates that roughly one-third of companies have no such plans, one-third share up to 10%, and one-third share over 10% (sometimes over 25%).
- Value-share decisions are contextual and unique to the company, depending on a broad set of factors such as stage and characteristics of the business, intensity of war for talent, pay philosophy, and capital structure.
- Public companies average about 11% median value-sharing amount, according to a study by Frederick W. Cook & Co. (technology: 15.5%; retail: 11.6%; manufacturing: 8.9%; financial: 8.2% as of 2010).
In the next article in this two-part series on value sharing programs, we’ll share the BOLD Value Team’s findings on how companies should structure their programs.
Mark Bronfman, a private wealth advisor at Sagemark Consulting (www.BOLDValue.com), will be moderating the panel discussion at the upcoming Seminar, “Winning in a Disruptive Competitive Environment” with panelists Phil Soucy (MTSI), George Wilson (ECS), Bill Mutryn (H&K) and Tim Garnett of Avascent. For additional information on this exciting event – or to register online – click HERE. To download the Sagemark Consulting value-sharing research, click HERE.