Last week, we discussed the importance of value-sharing programs when it comes to business succession. According to recently released research by Mark Bronfman at Sagemark Consulting (see www.BOLDValue.com), these programs can ensure sustainability of management teams, provide critical performance incentives, and aid in capital structure and exit planning.
For c-suite executives who are interested in implementing their own value-sharing program, the BOLD Value team has identified four findings when it comes to structuring your programs. These results have been gathered from 24 experienced deal practitioner respondents out of approximately 100 queries:
- It is increasingly common for private companies to offer a mix of plans that provide liquidity throughout the company lifecycle. Some companies, for example, offer plans that provide executives some liquidity on a rolling 3 to 5 year basis, upon separation from service, or change in control.
- Deal practitioners sometimes recommend capping, in some way, the amounts paid to critical executives for value-sharing plans that pay out in the event of change in control. This cap is intended to ensure that the buyer can retain these executives after the transaction. Some respondents cited six times latest total cash compensation as an upper limit.
- The use of synthetic equity such as phantom stock or units grew by over 70% in 2011 vs. 2007 at private companies, according to a recent WorldatWork/Vivient survey. Similarly, the use of performance-based awards (rather than outright stock options and restricted stock/units) at public companies grew by 230% over the past dozen years, based on the article by James F. Reda et al. in the May/June 2013 issue of the Journal of Compensation and Benefits.
- Synthetic equity enables companies to offer more customized long-term pay for performance plans. Our BOLD Value team, for example, has designed several synthetic equity “value band” plans offering gradually higher value sharing as the company increases in equity value. Similarly, we have recently designed enterprise-value plans to reward key executives for enterprise growth without adjustment for changes in capital structure (particularly important in the context of leveraged buyouts, including ESOPs).
Value sharing is an art. Great benefit comes from crafting arrangements comprised of true equity, synthetic equity, and cash performance plan that meet the overall mission, vision and values of the key company stakeholders.
Mark Bronfman, a private wealth advisor at Sgaemark 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.