Incentivising management in venture capital and private equity based companies

Attraction and retention of top talent is becoming increasingly critical to small and/or fast-growing companiesí success. However, it is also about making sure that senior manager and key employee motivation and objectives are properly aligned with the organisation over the medium to long term.

Any company seeking additional investment to accelerate its growth potential will come under close scrutiny regarding the capability, breadth and security of the existing senior management team:

Is the team sufficiently well incentivised
Are these incentives redeemable only against delivery of activities adding value to the business
What additional skills and capabilities are required and how will these be incentivised
Are there employees outside of the senior team critical to the success of the organisation and, if so, are they incentivised to stay with the company and continue delivering.

Attraction and retention of senior and key employees is not purely a broadly based remuneration strategy but it certainly represents a major part of that equation. Of course communication, leadership and management, recognition and opportunity all play a part in the success of the company concerned. However, they merit a separate discussion altogether.

What steps should the VC or other major investor take in ensuring that management and key employees are properly incentivised:

Basic Salary ñ is it competitive across similar companies in the sector
Short term performance related bonus ñ is it competitive, linked to corporate, team or individual objectives
Equity ñ is it valued by the individual, linked to tenure and/or performance and is full advantage taken of schemes available in the market, both Inland Revenue approved and otherwise:
o Enterprise Management Initiative (Revenue approved scheme enabling tax-efficient distribution of substantial tranches of equity up to a company limit of 3m)
o Company Share Option schemes (Revenue approved tax-efficient scheme enabling distribution of options to a grant value of 30,000)
o Long Term Incentives (flexible but less tax efficient mechanisms for distributing equity to senior managers, linked to tenure, company performance or individual performance)
o Restrictive schemes (an umbrella term covering equity schemes enabling discounted equity distribution through downgrading the status of the shares such that they have no voting rights)

Whilst it is understandable that companies will focus on senior and key employees when constructing incentive schemes, there is considerable benefit to be derived from ensuring highly valued and hard-working junior and administrative staff are incentivised to remain with the firm and continue to work hard. There is a range of tax-efficient equity vehicles aimed specifically at more broadly based low-level equity distribution:

SAYE (Save As You Earn) ñ staff can save up to 250 per month, typically over a 3 year period, to purchase shares at the end of the saving period at a price up to 20% below the market price extant at the outset of the scheme. Where the share price is anticipated to rise sharply this is an excellent retention tool for junior staff.
SIP (Share Incentive Plan) ñ a scheme offering a range of low level employee share purchase, employer matching and share granting mechanisms which can be driven by a combination of service and performance. As with SAYE it represents a great way of incentivising junior staff.
COSOP (Company Share Options) ñ up to 30,000 worth of shares can be allocated to staff as options.


Flexible and Voluntary Benefits

Provision of non-salary benefits is a valuable addition to any organisationís remuneration strategy. These benefits will include pension, life and critical illness cover, private medical cover, income protection and other lifestyle related products and services. Such benefits are tax-efficient for both employer and employee and typically much more expensive for the employee to source privately.

However, such benefits are frequently taken for granted and very rarely valued by the employee according to their cost. A flexible benefits scheme introduces several mechanisms which enhance employee understanding, and appreciation of employer funded benefits, increase choice and broaden flexibility. The three constituent parts, available as discrete modules are:

Total Reward Statements ñ each employee gets an annual statement outlining the value of their complete remuneration package divided into its constituent parts ñ salary, bonus, equity grants, pension, insured benefits and so on.
Flexible Benefits ñ because the constituent parts of the benefit package are independently valued employees can choose only the benefits matching their lifestyle with the balancing cash either taken as salary or re-allocated to other benefits. The flexible benefits mechanism includes a salary sacrifice facility whereby employees can sacrifice salary (with consequent tax and NI benefits to employer and employee) to buy approved services (childcare vouchers, computer purchase etc)
Voluntary Benefits ñ the employer buys into a market facility bringing substantial scale discounts across a wide range of non-employer funded benefits such as dental cover, travel insurance and other lifestyle benefits.

Investment in a flexible benefits structure has proved to enhance employee appreciation of employer spend on benefits consequently impacting on recruitment and retention.

Age Discrimination
2006 will see another category added to the body of anti-discrimination employment law ñ age.

Employers have until 1 October this year to review all policies, procedures and practices, and make any necessary changes, to ensure that they wonít be vulnerable to a claim of age discrimination thenceforth. However, it is not just a question of documentation. Probably the harder job is to engender a workplace culture in which age discrimination and harassment are as unacceptable as that based on sex, race or disability.

It will mean reviewing recruitment practice. Indicators such as ìyoung and energeticî or ìwould suit someone with a mature approachî will need to be consigned to the bin; along with the more obviously discriminatory ìwe seek candidates aged between 25 and 30î.

Any age related benefits for existing staff will need to be examined carefully in case they fall foul of the new law, although length of service benefits such as salary or holiday increments in general can be maintained.

Perhaps the biggest impact of the new law will be on retirement ages. From 1 October, employers will not normally be able to require any earlier retirement age for their employees than 65. This will apply even where there is a company pension scheme operating from an earlier age, e.g. 60. Employees will remain free to retire whenever they wish, but a forced retirement before 65 could be viewed as an unfair dismissal. Employers will be obliged to consider requests from individuals to work beyond the default retirement age of 65.