A long term incentive program for an unlisted firm

The challenge

A major unlisted Australian business wanted to put in place a long term incentive (LTI) program to offer a comparable rewards structure to its listed peers and to encourage and reward decisions that grew the value of the business over time.

But unlike its listed peers, our privately held client had no readily observable market price for its shares. How could an LTI program that was dependent on changes in the value of the business be put in place without a share price?

How we responded

We worked with the Board and management to assess alternative methods of measuring performance, including the use of key drivers like Return on Capital Employed and Economic ProfitIn the end a discounted cashflow valuation of the business was selected, based on the Group’s long run forward plan.

Ordinarily, internal forecasts would be considered too subjective to be used in an incentive plan, but we developed an innovative solution that included substantial safeguards for shareholders, making it possible to use a forward looking, valuation based measure for incentive purposes.

The results

The new LTI program has been well received by staff and shareholders alike and allows our client to effectively compete in the market for senior executive talent, while encouraging decisions that will growth the long term value of the business. Indeed some executives have noted a preference for the new LTI program over market based measures, the results of which they felt were ‘a lottery’.