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Private Organizations

Long-term Incentive Plan Design for IPO Case Study + -

About the Client

The companies all began with a Private Equity Sponsorship structure with the intent to make an initial public offering. The companies set up an equity ownership performance structure, known as a “waterfall structure,” for their key executives. Private Equity sponsors used the waterfall structure as a vehicle to motivate the key executives towards the transaction, which became a problem as it created three classes of employees: 1) existing employees that were participating in the waterfall allocation, 2) new employees after the waterfall event, and 3) the participants of the waterfall event after their allocation has vested.

Project Description

The clients involved were private with Private Equity backing. These companies awarded key executives a percentage of ownership which would vest at the point of an initial public offering. The issue these companies were facing was of how to appropriately attract, retain, and motivate top talent after an IPO event. NFP Compensation Consulting (NFPCC) helped develop long-term incentive plans that were market competitive, utilized a simple vehicle which offered significant appreciation in line with stock price, and created hand-cuffs to retain those employees whom participated in the waterfall event. NFPCC worked with senior management to first understand the Company’s structure, and then independently developed a long-term incentive plan for the Compensation Committee, which was made up of the Private Equity Sponsors.

Benefit To Client

NFPCC aided the Company in independently designing a long-term incentive plan for the senior management of each sponsored company. The plans were designed to align exiting employees outside of the waterfall structure participants, future employees, and the existing key executives who were a part of the waterfall structure allocation group. The plans also aimed to maximize the Private Equity investors’ average return on investment. Overall, the Company’s average return was approximately three times the original investment.

Phantom Stock Plan Design Case Study + -

About the Company

The company is a holding company for privately held community banks.

Project Type

Phantom stock plan design

Project Description

The company had originally established a phantom stock plan based upon a percentage of return on equity and return on assets but the original plan was not easily understood by the plan participants and did not pay out as anticipated. The plan vested 10% per year over a ten year period and the values held by plan participants were not widely understood.
The Compensation Committee and management asked NFP Compensation Consulting (NFPCC) to develop a phantom stock plan that would: 1) balance risk and rewards, 2) align management with the long-term goals of the Bank, 3) link shareholder and executive interests, 4) retain management, and 5) be market competitive.

Benefit To Client

NFPCC first assessed market total direct compensation levels to determine how executives were compensated compared to the external market. NFPCC then determined appropriate long-term incentive targets to be utilized in the new phantom stock plan (market competitive opportunities).

NFPCC determined market competitive values for threshold, target and maximum levels in the phantom stock plan (balance risk and rewards). NFPCC worked with the Committee and management to determine the most effective performance metrics for the Bank (align management with long-term goals). The new phantom units were equal to a percentage of the company with plan participants eligible to receive dividend equivalent rights (link shareholders to executives). The units vested over a five (5) year period (retain management and be market competitive).

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