Management Incentive Plans
Getting MIPs right: Navigating structure, valuation and compliance
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:
Advice is typically split into 3 elements:
Award design and legal structure
£
Independent valuation
Tax advice
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