Whilst deciding these issues, one must always remember that the scheme should only reward success and ensure that a sensible balance is struck
between the size of rewards to staff and the dilution borne by the shareholders as a result of the exercise of the
take a proprietorial perspective, and as a result they look at ways to save money and fight that bit harder to retain or grow revenues.
Ravenscroft acts as the investment manager to Bailiwick Investments Limited, which is a closed ended fund that specialises in buying significant, but minority stakes in good quality businesses based predominantly here in the Channel Islands. The present portfolio of companies held by Bailiwick includes Jacksons (CI) Ltd, air services group ASG, Guernsey Recycling, which includes the operations of Island Waste, the Jersey-based finance company Acorn, and Legis Tax services. In addition, we have recently announced the acquisition of stakes in Sandpiper (CI) and MitonOptimal.
When we analyse these companies prior to acquiring them, one of the most important things we look at is the quality of the management and ensuring that it is appropriately incentivised to drive the companies forward and create value for the shareholders. Like us at Ravenscroft, this has been accomplished by putting in place various types of equity incentives, thereby aligning the interests of both the management and shareholders.
A whole book can be written on equity incentives, their design and implementation and they have many legal, accounting, HR and tax implications, which need to be taken into account. Historically, however, we have used three principle sorts of equity incentives.
Firstly, there is direct ownership in the company’s shares; this can be achieved in a number of ways. Firstly the employee can buy the shares at the time of acquisition, secondly equity can be “gifted” to them, the cost of this being treated as part of the deal costs, and finally a portion of any bonuses that become payable can be paid in shares rather than cash. This is normally structured in conjunction with lock-in arrangements to ensure that the equity received cannot be flipped out, and ties the employees into the company for an appropriate amount of time, normally between 18 months and three years.
Secondly, options over the firm’s shares can be granted to employees. Careful thought has to be given to a number of issues when doing this, namely; what is the appropriate exercise price? Should there be performance conditions? What should the vesting period be? Should there be good leaver, bad leaver provisions? And when should the options expire?
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options. Some option schemes over the years have been heavily criticised due to the fact that they could encourage the management and employees to take on more risk, knowing that they
share in the upside but other than through their employment, do not suffer from the downside risk. Arguably this caused some of the problems in the recent banking crisis. Combining options with ownership of direct equity can help mitigate some of this risk.
Finally one could put in place a long-term incentive plan or LTIP; this is basically a variation on the options route explained above. At a basic level, such a plan means that any uplift in the value of the company is shared between the shareholders, management and employees. This increased value can be given in shares, cash or a mixture. Obviously when designing such a scheme, one has to decide a) the percentage of the uplift that goes to each of the interest groups, b) how do you value the company at the start and the finish? And c) what is the measurement period?
One can of course use a mixture of these equity incentive programmes, and at Ravenscroft we have used all three at some point or other.
As you can see, putting in place equity incentives for management and employees is not a simple process and must be undertaken diligently. However, once implemented they provide, in my view, an excellent tool, that when properly used can incentivise management and employees to take their business forward, as they feel and act like part owners of the company they are employed by.
If you want employees, management and shareholders to all pull together, the most productive thing to do is put them in the same boat.
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