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Associate Director, EBT, TMF Group
26 April 2023
Read time
4 minutes

Attract and retain top-tier talent: How private equity companies can leverage management incentive plans

A team collaborating in a discussion at a modern workplace with laptop on the desk

In the current competitive business landscape, private equity companies face fierce competition when it comes to attracting and retaining top-tier talent. To address this issue, businesses may consider leveraging incentive schemes to appeal to prospective hires and to keep key employees.

One such scheme that is proving increasingly popular is the management incentive plan (MIP). A MIP offers numerous advantages to company and individual alike, be it through retaining valuable staff, attracting top talent, or providing employees with a real stake in the business through equity ownership.

Challenging circumstances for employers

Over the past few years, the global economy has experienced significant turbulence. The Covid-19 pandemic dealt a heavy blow to major industries such as travel and hospitality, forcing millions of workers into furlough, and causing millions more to lose their jobs.

Despite the economic crisis, opportunity arose for some industries. Companies that could operate remotely capitalised on this advantage. Big tech firms, for example, leveraged digital work processes to maintain operations and meet surging demand. This led to a hiring boom in many sectors, leaving businesses scrambling to keep pace.

The pandemic gave people a chance to assess their current (and arguably outdated) working conditions and reconsider what they might expect in an employment package going forward. The business world encountered new phenomena in the form of the ‘great resignation’ and ‘quiet quitting’.

Employees feeling undervalued or treated unfairly during the pandemic looked to move on to new positions. With a high number of vacancies flooding the market and roles needing to be filled quickly, this caused something of a hiring boom.

The problem that this movement caused for businesses is that replacing lost employees is often a slow, difficult and costly process. This has prompted companies to explore alternative methods of attracting and retaining key employees, beyond simply inflating salaries.

In 2022, with job vacancies for skilled workers in demand, pay expectations  hit a record high in the private sector, rising by a median of around 4%  - according to the Chartered Institute of Personnel and Development. Businesses are now pulling out all the stops to attract and retain key employees.

And with inflation and the cost of living rising fast, the energy crisis intensifying, the economic impact of geopolitical tensions between Russia and Ukraine, or China and the US, and with the threat of a global recession persistently looming, increasing salaries is not a sustainable option for most companies, especially with operating costs and margins to consider.

So given the current economic and financial climate, how else can employers attract and retain staff?

Incentivising employees doesn’t have to cost your company money up front

A proven method for companies to attract and retain the best talent, while simultaneously keeping immediate business costs down, is to reward key employees with equity as part of their compensation package.

Equity plans enable businesses to offer shares to their most valuable team members in addition to their base salary and benefits. These types of incentives are already popular within the tech industry and with start-ups who have limited cash reserves but need to attract quality workers. For private equity firms in particular, the use of MIPs is a path well-trodden for those seeking to retain key employees within their portfolio companies.

However, for equity compensation to work effectively, the employees’ interests and career objectives must align with those of the employer or shareholder. Importantly, MIPs allow the management team to benefit in the increase value of the business they help build.

While the offer of equity is generally limited to a small group of key management figures, the current market conditions may see a wider pool of employees being offered such plans, as they can not only help to retain talent but also attract it.

Effective planning and structure are important

The structure and performance levels of the equity plan should be communicated clearly to the employee. This ensures they are part of the process and understand the benefit being bestowed upon them and further aligns employees with other stakeholders. It is common for MIPs to be subject to vesting periods which can vary in duration but, in general, seek for employees to remain in the business for three to six years, subject to certain criteria.

In our experience, the administration involved in implementing an arrangement should be given due consideration, especially when there is likely to be a short timeframe to collate any necessary information. A good example of this is the undertaking employee due diligence, which can be an administrative burden and, therefore, can often take longer than expected. We recommend identifying which party is responsible for this as early as possible, given that it can often fall between client and advisor.

Another important point to agree upon is who is responsible for funding the purchase of shares in relation to the share plans and the employee benefit trust. This will on many occasions have an impact on the documentation which is required from employees and also may have implications for FATCA/CRS reporting.

Seek expert help

Enlisting the help of an experienced, global HR administrator and payroll provider, like TMF Group, can ensure that planning and establishing an employee equity plan or MIP is carried out smoothly, efficiently and compliantly.

Companies can tap into decades of experience in handling the complexities of establishing and managing schemes in more than 80 jurisdictions worldwide. We serve corporates, financial institutions, asset managers, private equity and real estate investors, and family offices. Our clients include more than 60% of the Fortune Global 500 and FTSE 100, and almost half the top 300 private equity firms. Our global HR and payroll experts can help companies navigate a range of equity compensation scenarios to decide which is best for you.

To learn more about employee equity plans and how TMF Group can help, contact us today.

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