Incentive Plans: current trends and market conditions

Incentive Plans: current trends and market conditions

Incentive plans aim to facilitate attracting and retaining talent, a considerable challenge especially in today’s entrepreneurial ecosystem, where startups in their early stages often struggle to compete with the salaries offered by large multinational corporations.

In response to this reality, two main categories of measures are typically adopted.

• The first set focuses on improving working conditions compared to competitors, such as flexible working hours, partial or full remote work, fringe benefits, or more relaxed work environments, all designed to enhance the quality of life for employees.
• The second block encompasses economic incentives usually tied to professional performance or business results, such as bonuses or incentive plans.

The latter are particularly intriguing as they tend to establish lasting connections with key employees. To fully obtain these incentives, a time period (vesting) is usually required during which the beneficiary gradually consolidates their incentive, often by meeting specific key performance indicators (KPIs).

What the Incentive Plans include

Within incentive plans, traditionally two models are found: stock options plans, granting the right to acquire company shares and thus become a company shareholder, and phantom share plans, providing economic but not voting rights. The latter allows benefiting as shareholder in specific situations, known as “liquidity events,” such as the sale of 100% of the company, a change in its control, or dividend distribution.

Of course, the advantages and disadvantages of stock options and phantom shares must be understood. In particular, the advantage of these incentives lies in their flexibility. Within the scope of private will autonomy, the entrepreneur can set conditions in the incentive plan as deemed appropriate, provided they are clear and understandable to the employee or key personnel.

Furthermore, while the plan establishes a general framework affecting all beneficiaries, each individual must subscribe to an endorsement letter outlining specific conditions known only to the company’s management and the respective employee or key person. This includes details such as the quantity or percentage of stock options or phantom shares granted and the KPIs required to consolidate their holdings.

Incentive Plans: other important aspects

Another noteworthy aspect is that incentive plans can regulate what happens if the beneficiary fails to meet commitments, leaves the company, or is terminated. This allows, for example, agreements specifying that if an employee leaves the company, they must sell their holdings at a predetermined value or as determined by an established calculation method.

These plans, drafted by the company’s management and requiring approval from the shareholders’ meeting due to their direct impact on the shareholders, are essential for regulating these rights.

Currently, given the socio-economic circumstances, incentive plans are experiencing a significant surge, with phantom share plans standing out. This is because the alternative of stock options may lead to an undesired effect, such as the fragmentation of the social capital by including a multitude of small shareholders, complicating the management of the company.

However, in response to this situation, the mandatory syndication of minority shareholders can be considered.

While these plans represent the best approach to retaining talent, they do pose challenges in terms of incentives for impatient beneficiaries. Since several years may elapse before a startup is fully sold to a third party, undergoes a change in control, or begins profit distribution, especially if the startup is still in a maturation phase, hybrid models are emerging in the market.

These models combine a short-term incentive system, such as bonuses, with a traditional incentive plan to retain key employees in both the short and medium term, adapting to the changing needs of the company at different stages of its development.

At Letslaw we specialise in the incorporation of incentive plans, so contact our team of  commercial lawyers if you need lawyers for phantom shares and stock options, they  will be able to advise you on everything you need.