September 2024
Incentive structures play a crucial role in aligning the interests of management teams with those of investors. These strategies can vary significantly, with some designed to reward short-term achievements and others focused on fostering long-term success. Properly structured incentives benefit management teams by providing clear goals and motivation, ensuring that their efforts are recognised and rewarded. Additionally, competitive incentive packages are key in attracting top talent, as they offer potential leaders the opportunity to share in the success they help create.
At Advent, we typically adopt a two-pronged approach to incentives. Over the course of our hold, we use Short Term Incentives to provide immediate recognition for meeting annual performance targets, and longer-term incentives, such as Management Equity Plans, to reward management at the time of Advent’s exit. This strategy ensures that management’s efforts are closely aligned with the company’s short and long-term growth.
1. Short Term Incentives (STIs)
Short Term Incentives are typically awarded on an annual basis, based on the achievement of agreed Key Performance Indicators (KPIs). These KPIs are usually a mix of financial targets related to the budget, such as revenue growth and profitability, and qualitative measures, including ESG (Environmental, Social, and Governance) criteria and other strategic goals. STIs are designed to reward management for meeting short-term objectives.
Key Features of STIs:
- Annual Assessment: Incentives are awarded based on performance each year, ensuring management remains focused on achieving yearly goals.
- Balanced KPIs: A mix of financial and non-financial targets ensures that both quantitative and qualitative aspects of business performance are considered.
- Immediate Reward: STIs provide timely recognition of management’s contributions, reinforcing the importance of short-term achievements.
2. Management Equity Plans (MEPs)
Management Equity Plans are a powerful tool for long-term alignment between management and investors. These plans often involve a loan-backed share structure, where the company provides a loan to the manager to acquire shares at market value. These shares typically vest at the time of the company’s exit, such as through a sale or IPO. By linking the manager’s potential gains directly to the company’s success, MEPs ensure that management teams are incentivised to drive growth and work towards a successful exit.
Key Features of the typical Advent MEP:
- Equity Allocation: Management teams are allocated a portion of the comany’s equity, ensuring a vested interest in the company’s future success.
- Vesting at Exit: Shares vest at the point of exit, aligning management’s focus with achieving a successful sale or IPO
- Non-Performance Based Vesting: Simplifies the plan, ensuring clarity and alignment with investors’ interests.
In some circumstances, it is not practical to implement a MEP structure. In these situations, we sometimes implement transaction bonuses for management at exit.
