Management incentive plan

Definition

A plan setting how much of the upside the managers you keep will share.

Why It Matters

Phantom equity and a retention bonus are instruments; this is the plan that decides how large the pool is, who is inside it, and what has to happen before anybody is paid. A first-time owner usually inherits managers who hold the customer relationships and have no reason to stay through a change of control, and the pool is the answer to that. Size it before the first conversation, because a number offered under pressure becomes the floor for everyone who hears about it, and let the trigger be a specific event: a sale, a refinancing, or a stated multiple reached.

In numbers: A 10% pool on a business bought for $4M is worth $400,000 at the same price, and nothing at all if a sale never happens.