Management Incentive Plans
Management Incentive Plans
Getting MIPs right: Navigating structure, valuation and compliance
Early engagement
Thinking forward
Engaging a valuation adviser early enables a clear understanding of the business and the draft award structure, while guiding management in preparing the necessary financial information. This proactive approach helps ensure a smooth and efficient process once the structure is finalised, and keeps initial costs to a minimum by front- loading only essential input.
MIPs are inherently forward-looking, and careful consideration must be given to future profitability, debt levels, exit value and timing. These factors influence both the proceeds award holders may receive and the initial value of the award itself. Hurdle rates, scenario probabilities and delivery risk all play a role, and involving the valuation adviser early in structuring discussions can help avoid surprises later.
MIPs have become commonplace at every level of the growth cycle, and almost ubiquitous in private equity backed companies. Given the central role they play in motivating management to generate business value, the importance of ‘getting them right’ should not be understated. The issuance of a MIP is a transaction in share capital. Given the number of options available and the range of structural considerations, having an experienced team of expert advisors to guide the process is vital.
Significant increase in the use of MIPs, especially among PE and VC backed businesses. A particular rise in growth shares, and an increased variety in the structure of hurdles. The changing stance of HMRC, and the increased sophistication with which they assess value. A standardising of valuation methodologies, but an increased expectation regarding depth of analysis. Increased scrutinisation of MIPs in transaction due diligence to assess potential impact and any compliance issues or risks such as understatement of tax liabilities. Having worked with numerous funds, legal advisors and corporate boards of directors on the valuation aspects of MIPs, we recommend the following as best practice considerations: For several years FRP has provided formal advice and reports on the valuation aspects of MIP awards, working alongside legal and tax advisers. We have seen the landscape evolve as follows:
Setting a hurdle
Funding the tax
The hurdle should balance ambition with achievability, offering a stretch target alongside meaningful payout potential. Negotiation between recipients and shareholders is common, particularly around hurdle level and exit timing. Valuation advisers can support this process by modelling scenarios across different hurdles, exit values and dates, helping all parties agree on a fair and motivating structure.
More generous awards typically carry a higher upfront tax burden due to the link between hurdle level and initial award value. Clarifying how this tax will be funded - whether by the recipient or via a company loan - is essential to avoid last-minute complications. Addressing this early ensures smoother implementation and reduces the risk of delays or compliance issues.
Advice is typically split into 3 elements:
Award design and legal structure
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The valuation of MIPs is a complex area. Our valuation team has the expertise and a strong track record of preparing independent valuations for tax purposes. Please get in touch with either Jim or David if you would like to discuss the valuation of MIPs.
Independent valuation
Jim Davies Partner Financial Advisory London +44 (0)7841 829 826 jim.davies@frpadvisory.com
David Blum Director Financial Advisory London +44 (0)7977 244 842 david.blum@frpadvisory.com
Tom Rees Director Financial Advisory London +44 (0)79 0770 4298 tom.rees@frpadvisory.com
Tax advice
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