If you’re a business owner or CEO, particularly in growth-oriented small to large private companies, you’ve likely faced the tough decision of whether to share equity with employees. It often starts with good intentions: “I thought giving some ‘skin in the game’ was the key to attract the best and brightest—so I gave them shares.” It seems like a quick fix, but many leaders regret it later.
Why? Here are some of the common reasons business owners feel that regret:
- Performance Misalignment: The employee or company performance doesn’t justify the equity dilution.
- Exit Challenges: No clear exit strategy for buying out minority shareholders if circumstances change.
- Transparency Concerns: Owners may need to share sensitive financial information with employee shareholders.
Many business leaders turn to equity sharing simply because they aren’t aware of better alternatives. Both employers and employees often assume equity is the only way to offer a stake in the business’s success. However, when structured well, long-term incentive plans (LTIPs) can achieve the same goal, without the headaches.
Smarter Solutions: Long-Term Incentive Plans (LTIPs)
Instead of resorting to equity giveaways, here are five Long-Term Incentive Plan (LTIP) strategies to consider, which can benefit both the company and its key contributors.
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Full Value Shadow Equity
Shadow equity (also known as phantom shares) mimics equity ownership without actual share transfer. Employees receive cash payments based on the company’s valuation growth (and achievement of performance hurdles if applicable). This model rewards employees for business success while avoiding shareholder dilution and maintaining control over financial disclosures.
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Share Appreciation Rights (SARs)
Similar to regular employee share options, SARs allow employees to benefit from the company’s value growth. If an employee receives SARs valued at $100 and the company’s value rises to $150, they pocket the difference in cash without receiving actual shares. This plan motivates employees to drive company performance while avoiding shareholder dilution.
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Profit Pool
A simple yet effective option, a Profit Pool allocates a percentage of annual profits to employees, often based on exceeding a minimum threshold. This amount is distributed among staff, encouraging ongoing growth. Over a set period (e.g., three years), employees receive a portion of the accumulated value, with the remainder rolled forward to incentivise long-term engagement. Employees leaving the company usually forfeit their share, and companies may choose whether to apply interest to the pool.
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Deferred Short Term Incentive (with Company Matching)
Leveraging the annual incentive/bonus plan, the employee elects to defer some or all of their award to a future date e.g., two years. To encourage this the company matches the amount deferred which is subject to the employee remaining with the business for the deferral period. The matching ‘carrot’ can also be enhanced with a link to the company’s long-term appreciation.
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Performance Unit Plan (PUP)
A PUP ties rewards to achieving specific financial metrics (e.g., margin improvement, sales growth). Employees receive units with a notional starting value (often linked to enterprise value), which appreciate based on performance outcomes over a multi-year period. The units typically convert to cash after three years based on the enterprise value at that time. This structure is flexible and can be tailored to strategic priorities.
Choosing the Right Approach for Your Business
The right LTIP depends on your company’s goals. For example if your focus is:
- Reward enterprise value growth: A Share Appreciation Right Plan can directly tie rewards as the company value increases over time.
- Encouraging leaders to ‘think like an owner’: Shadow Equity can help align senior leaders with long-term value creation.
- Improved profits: A Profit Pool can encourage behaviours aligned with delivering enhanced financial outcomes.
The ultimate aim is to create a value-sharing framework that enhances employee engagement, supports retention, and drives performance—all while maintaining ownership stability.
As Australian companies face ongoing talent shortages and a competitive market, considering these alternatives can provide a strategic edge. Choose wisely, and you can build a motivated team that contributes to your company’s sustained growth and success.
If you’re wondering:
“Sharing real employee equity is still the best way to attract and retain our talent” Read 8 Steps To Employee Share Schemes In Private Companies
“Are our incentive measures right for where the business is heading this year?” Read Incentive Measures For Each Stage Of Business