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Obviously, the acquiror of a business wants to make a good return on its investment – and one way to do this is to incentivise the key employees in the target company to buy into its equity, aligning and incentivising them to continue working hard to deliver its strategic plan.

But if the acquiror is PE-backed itself, the acquisition will in many cases drive changes to the existing MIP.  Will the senior executives, and even the junior management team, of the acquired business be invited or required to invest in the existing structure?  How does this impact the current structure, and what if there is no equity left to distribute?

Often the acquiror will want the managers of the target company to have an interest in the group, ensuring alignment on the broader strategy of the enlarged group – but the managers in the target entity are now following somebody else’s business plan rather than purely their own.  So their appetite for financial commitment here may be lower than when they were in a standalone business and may not meet the expectations of the new owner. 

In some instances, the new strategy might envisage the acquired company operating as a distinct limb of an overall group.  The target might be the first UK business bought by an overseas investor that intends to keep it operating as an autonomous subsidiary and, therefore, it might make most sense to put reward structures in place linked purely to the performance of that business rather than a group wide plan.

How a trusted, experienced adviser can bring clarity to a nuanced situation

At Liberty Corporate Finance, we have advised on deals in which the C-suite in the acquired business are rewarded at both the subsidiary (SubCo) level and the group level, while the junior management team participate solely at the SubCo level to focus and align them on their own P&L.

This can be a highly nuanced situation. There are several ways to operate an incentive plan – and many questions to be answered, such as whether the CEO of the target company joins the board of the group, for example.

If you are that CEO, and your MIP is dependent on the performance of the group, you will now be judged not just on the performance of your own division but of other parts of the new entity.

Our advice is always to understand the wider business plan so that you have a clear view of the structures and the strategies that will apply to your business, and your rewards, over the coming years.  

As mentioned, often the management team in the acquiror will allocate equity from the existing MIP to those managers at the acquired company. But there should be an element of protection for the value created by the existing managers, with new joiners rewarded only for future growth for example.

As with so many elements of private equity transactions, this is a key area where effective communication is absolutely essential. The new joiners into the group MIP should be in no doubt as to the extent of the rewards they will receive, and how they will be incentivised to deliver against the strategy of the new entity they now work for.

As part of the advisory service Liberty can deliver, we can help you to tackle the challenges and questions that an M&A-led strategy throws up. We can also assist in making the communications to managers as clear and impactful as possible so that all parties concerned know precisely what to expect going forward.