PE firms move quickly to manage key person risk in post Covid environment.
As the world tries to understand the post Covid-19 world and operating environment, the demand for leaders who are change oriented, strategic and agile learners is greater demand than ever. Typically these traits are found in the leadership teams of Private Equity (PE) owned businesses alongside other admirable traits such as having a higher level of tolerance of ambiguous operating states and risk appetite for trying new things.
To date these leaders have been remunerated in a slightly different manner to similar level executives in more established roles, namely a lower base salary, with higher potential performance related bonus and a long term incentive linked to the firm wide ERP process. However as businesses struggle to re-establish earnings certainty and profitability in the post Covid era, and with the PE investing cycle has being disrupted, the leadership teams of these investments are working harder than ever to keep these businesses active and viable for sale at some point in the future.
This is where the typical PE remuneration model is not delivering an equitable pay for effort solution, with many Boards now revisiting how they pay their top talent and more importantly, retain them whilst competitors seek similar talent.
Solutions to the above can be as simple as freeing up some of the incentive capital as a one off payment to executives as an interim measure, effectively making them whole for the life on the employment contract, through to linking earnings and multiples of earnings for valuation to remuneration. Others might undertake a full review of the remuneration structure and composition of all employees. Some of the more creative solutions lie in thinking about warrant or milestone payments upon divestment of some parts of the business, or doubling up on the performance element, a high risk / high reward option in this environment.
Lighthouse has developed some creative and usable solutions which we have already advised existing clients on, please call or email us for more information. www.lighthousesearch.co.nz/blog
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