Jo Haigh
Incentivising your key staff doesn’t have to mean diluting your ownership. One of my favourite ways of engaging with your staff on a long term basis is via a phantom share scheme, or as it’s sometimes called an LTI (long term incentive).
In order to produce a great and relevant scheme, you need you to consider a number of issues.
The beauty of an LTIP is that you can write your own rules; you need no revenue or other regulatory approval, so it can be as complex or as simple to suit your needs.
The scheme generally works by creating a business base value, which gives you as the vendor, the ability to allow key employees to participate in any uplift in that value for a given period or related to a specific event, such as a sale of the enterprise.
Here are some points to review before you start the process. This is not meant to be an exhaustive list but it’s a good basic start.
- What total % of the uplift do you wish to allocate (the allocation pot)?
- Do you wish that to be a finite %?
- On day one of the allocation, do you wish to allocate the whole allocation pot?
- If you introduce other people into the scheme, would you anticipate everyone would take a dilution or will you issue a greater total %?
- Equally if participants leave, what do you wish to happen to their %? Will it for instance just sit in escrow, or will it go back into the pot for reabsorption by the other participants?
- Would you like to be able to allocate extra LTIPs % to some or all individuals based on certain performance criteria?
- If so, what do you have in mind as performance measurements?
- Do you wish all members of the scheme to know what each other person has % wise?
- Do you want value out to be linked only to a definite sale of the business, or to a defined date?
- Do you want participants to be able to cash out some or all at given dates and if so what triggers would you like for this?
- Do you want to have good / bad leaver clauses that allow the participant to either exit with nothing if they are a bad leaver, or to have all / some rights if they are a good leaver?
- What are your criteria for good and bad leavers?
- Would you like to share any burden of the difference on a pay-out due to relevant tax effect of a capital gain v income tax charge, or do you expect the participant to bear such costs?
- Who do you expect to pay employers NI on a pay out?
- What conditions would you like writing into a scheme in relation to death in service?
- What conditions do you want in relation to actual cash pay-out, i.e. in relation to say the business ability to make such cash payments, due to cash flow issues?
- Will you want an annual review of valuation and presentation on the value of an issued LTIP %?
- Do you want the flexibility of the right to roll over a ”cash in” to a different period, or do you want dead stop dates?
- Finally, consider carefully who you want in such a scheme. It should not be given lightly and should be reviewed in terms of worth to the participants annually, to maintain interest.
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Jo Haigh is head of FDS corporate finance services and the author of The Financial Times Guide to Finance for Non Financial Managers. You can reach her at johaigh@fdscfs.com.
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