Management and shareholder interests must align if a company is to
achieve its strategic objectives. The link between shareholder value and
management remuneration in the form of incentive compensation is the critical
element that rewards those who run the company for protecting the interests of
those who own it.
To be effective, incentive compensation must reward management for
achieving objectives that serve the interests of the owners. Because an
increase in shareholder value is almost always the ultimate objective,
management is often given an equity interest in the company. Particularly in
public companies, management and shareholder interests are aligned by providing
incentives in the form of stock options or other forms of equity. Providing
compensation in the form of equity also conserves a company's cash and can
provide capital with which to fund ongoing growth. For senior executives in
particular, equity incentives have been a path to significant wealth.
Case study:
Client: Family owned service company.
Situation: Client was about to consummate an acquisition and would
be incurring a substantial amount of debt.
Objective: Encourage growth, the aggressive repayment of debt and
the creation of substantial shareholder value.
Solution: Key managers were given the equivalent of valuable equity
incentives, but without creating minority shareholders and while preserving the
company's cash flow.
The plan provides management with incentives for achieving targeted
levels of cash flow and returns on invested capital. To provide a longer-term
incentive, amounts earned are partially deferred and are subject to a vesting
schedule. A substantial equity equivalent is provided through the creation of
restricted stock and stock option equivalents which will increase in value as
earnings increase and as debt is repaid. If the company remains private, earned
incentives will be deferred until the managers' retirement from the company,
providing the company with a substantial cash flow benefit while providing its
employees with a tax deferred supplemental retirement benefit. A provision of
the plan will convert the benefits into shares of common stock if the company
goes public.
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