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What role do equity incentives play in attracting and retaining top talent?

07 February 2024

There are some fundamental reasons why private equity-backed businesses are so eager to offer attractive incentives to their employees. This is a way of attracting and retaining talent and encouraging your teams to deliver their best efforts as they work towards a common goal, united as they are by the prospect of receiving a share of the value they create.

Incentives are a particularly potent weapon in sectors such as tech or healthcare, where the competition for top executives is intense. You may be trying to lure talented individuals who are already well compensated through options and equity incentive schemes. These are people who could easily go to work in banking, where they would get healthy bonuses and salaries – how do you attract someone like that with an incentive scheme?

It's important to be able to explain in this context how an incentive scheme works, and the benefits it could deliver in the future. This is where our expertise is valuable to a range of businesses; we can help them to shape the scheme but also, crucially, to communicate the benefits to people at various levels of their organisation.

Communication is key in securing buy-in from your teams

If you want to achieve buy-in from your C-suite, senior executives and middle management, it’s essential to be able to communicate effectively and impactfully how an incentive scheme is going to work. In many cases, the senior management team might understand the numbers and the return curves, but the more junior members might need it broken down and communicated in a more digestible form.

This may sound simple and obvious, but the ability to formulate a communications package that gets everybody on the same page is a compelling asset for any business leader. It can help colleagues to ensure that all levels of the business are striving for the same goal and the same outstanding results.

Take, for example, a client looking to control salary costs over time. Instead of excessive pay rises, they would prefer to offer equity incentives that would pay out a far bigger overall number – if the company achieved the desired results – but in five years’ time, in line with the investment horizon of their PE backers.

There’s an obvious risk that people would dismiss that eventual payout as pie in the sky, and would focus instead on the negative outcome – that they would not be getting the pay rise they expected. If you can communicate the benefits effectively, so that they can see this is not just a mythical piece of paper in a drawer, people will buy into the real prospect of receiving a handsome reward further down the line.

It's also worth pointing out that, if your company is spending less in salaries and bonuses, you are driving profit as you grow. And ultimately, that profit will help to enhance the value of the business.

A further element to emphasise in your communications is the potential tax advantages of equity incentive schemes. Because they are largely share-based, they are subject to capital gains tax rather than the conventional annual bonus structure which will be taxed at the recipients’ top rate of income tax.

The contribution of a third-party specialist such as Liberty can play a key role in the success of that communication. We can convey the message that the incentive scheme is fit for purpose – and we can offer examples of other businesses that have instituted such a system, with outstanding results for everybody on the scheme.