Case Study: Pre-IPO Long-Term Incentive Design for a Diversified Company
Background
- The firm was a large scale diversified enterprise preparing for IPO.
Objectives
- Introduce effective LTI plans to promote partnership and ensure the alignment of interest between key talent and shareholders to drive IPO.
- Strengthen pay-for-performance, motivating employees to maximize profits for the firm while preventing excessive risk taking.
Process
- Conducted LTI workshops to examine the features, pros and cons of different LTI vehicles.
- Proposed LTI plans which consisted of deferred bonus, performance shares and share options. The plans only cover senior executives which are similar to market practices.
1. Deferred Bonus
A certain percentage of annual bonus would be deferred. When the deferred bonus become vested, employees could choose to purchase phantom shares and enjoy special discount
2. Phantom Performance Share
- The relationship among share quantum, KPIs and targets were pre-determined; actual share grants were based on achievement of firm-wide KPIs.
- Share grant was subject to 3-year vesting, dividend equivalent will be paid to cash when shares become vested. Employees had to fulfill certain individual performance requirements in order for the shares to be vested; otherwise they will be forfeited and recouped by firm. Employees should hold the shares during employment.
3. Phantom Share Options
Share options were granted annually and vested in three years. Employees could exercise options after a certain period and should hold the shares during employment.
- Conducted scenarios analysis and cost analysis, provided documentation templates and supported staff communication.
Results
- The proposal was approved by the Board and became an important part of the firm's long-term strategies.
Illustration: Granting and Vesting Schedule of LTI Vehicles
