In a recent episode of our Stock 'N Roll podcast, Optio's CEO, Christoffer Herheim, sat down with equity compensation expert Sonia Gilbert, a partner at Clifford Chance, to explore how private equity structures management incentive plans. They discussed why real equity ownership still defines the top tier, the growing push to share value more broadly, and the tiered structures emerging in between.
Management incentive plans (MIPs) are one of the more mysterious corners of equity compensation, and in private equity they work quite differently from the plans you find in a listed company or a VC-backed startup. This episode gets into what a PE incentive plan really looks like in practice: who holds real equity, why tax shapes so much of the design, how far ownership can sensibly be pushed down an organisation, and the challenge of communicating value when there is no daily share price.
"I'm really pleased we're talking about this topic, because it can be one that's a little bit mysterious to people," says Sonia Gilbert, a partner at Clifford Chance whose days are spent on all things remuneration related, with a particular focus on private equity and management incentivization.
Given Sonia's long-standing experience and her broad view on the topic, the key takeaways are highly insightful and are paving the way for a more differentiated approach to PE long term incentivization:
1. The classical MIP is here to stay
Real equity ownership remains a PE requirement: it provides an ownership perspective and tax efficiency (capital gains versus income tax). Because a MIP typically requires significant private cash investment in a highly complex scheme, it works best for a small group of key executives rather than a broader workforce.
"You're trying to make sure that people are genuine owners of the business when it's private equity backed, so they are really sitting alongside that private equity investor, feeling the pain at times the same way the investor might, but also feeling the upside," Gilbert explains. The tax angle reinforces it: senior people tend to hold real shares, bought at the outset, so that any growth is taxed as capital rather than income.
2. Broader employee participation is gaining momentum
There's a clear push from the US market, including the Ownership Works initiative, to broaden participation in value creation, especially at companies where employees are already used to long-term equity-related schemes.
The pull is strongest where a business has moved from public to private hands. "People had that before they were in private ownership, now we need to give them something else," Gilbert says of employees used to SAYE and SIP plans that cannot survive a take-private. The main barrier to going wider is not appetite but explanation. "A lot of these arrangements are harder to communicate. I know of management, super bright, entrepreneurial people running brilliant businesses, who say, 'I didn't quite understand what this MIP was,'" she notes.
3. The tiered approach
Putting the two together, a tiered structure looks like the way forward: a MIP for the key executive team who are able and willing to invest private money, alongside an equity-linked program for the broader team, potentially a second-tier MIP on different terms, or a simpler scheme for a larger group, such as exit bonus entitlements or more classical option programs.
"You may get a tiered approach: real equity at the most senior levels, maybe equity but with slightly different terms in the middle, and then something broader-based, which might be shares, cash or options," Gilbert says. She points to a company that took an equity-linked plan to around 1,000 employees globally using exactly this shape.
The hardest part: communicating value
In a listed company there is a daily share price. In a PE-backed business there is not, and that changes everything about how value is understood between investment and exit.
"I find this really challenging," Gilbert admits. For a long time after the investment, the business may sit at close to the same value before, all being well, it climbs steeply towards exit. "It's a difficult message to say to employees: maybe there's no growth here, maybe you've actually invested and there's still no growth here."
That is why most companies hold back on frequent valuations. "You tend to see people being told, 'we'll let you know closer to the point of exit what this is going to be worth,' or 'we won't know what it's worth until we get to the point of exit,'" she explains. The honest approach, she argues, is being upfront about what you can and cannot share, and being clear about hurdles and the waterfall so nobody assumes they are in the money when they are not.
Why the plan often sits behind a pooling vehicle
Employees frequently do not hold shares directly. They sit behind a pooling vehicle such as an SPV or an employee benefit trust. That keeps the share register clean, makes an exit more straightforward with a single shareholder to deal with, and protects confidentiality.
"You've only got that one pooling vehicle showing, and it doesn't say Tom's got five and Sarah's got 20," Gilbert says. The job, then, is to explain the structure plainly. "It's really important to explain to people what this thing is, so they understand: I'm not a direct shareholder, but ultimately I'm getting the same economic benefits as if I sat on that register, and there are some very good reasons for me not to be."
A blueprint for getting the mix right
Asked how she would structure incentives for a 1,000-person, PE-owned business with a seven-person management team and around 50 senior executives, Sonia laid out a tiered answer.
"I would definitely have my top seven holding real equity through a MIP, so they know they've got that skin in the game alongside me as the private equity investor," she says. The next 50 would get something equity-related, but not the full MIP, and the wider workforce would share in the outcome directly. "I'd give the 1,000 an exit bonus, a pool, so that everybody gets something as a result of the transaction."
Underpinning all of it is one non-negotiable: people have to understand what they hold. "If they don't, these incentives are valueless. Why have them? You can give cash instead."
How Optio supports the shift
Optio is well positioned to support this shift, across both ends of the structure:
- Broad-based schemes: we administer classical equity-linked schemes at company level, built for onboarding at scale, with functionality such as automated IFRS 2 reporting.
- MIP-level schemes: we set up and administer plans that sit at shareholder level, handling more complex onboarding (including KYC) and tracking through multi-entity cap tables and waterfall calculation tools.
To hear the full conversation, listen to the Stock 'N Roll podcast episode. If you're ready to design a private equity incentive plan that works at every tier, get in touch with the experts at Optio Incentives today.
"Please note: This podcast content is for informational purposes only and is not intended as professional advice. Always consult qualified legal, tax, and financial advisors for guidance specific to your situation."
Stay tuned for more episodes of Stock 'N Roll as we continue exploring the world of equity compensation: from theory to practice.
Felix Rose
