Designing Long-Term Incentive Plans in Joint Ventures
As published in The Joint Venture Exchange in April 2011
The CEO of a relatively new JV (Joint Venture) was struggling with his long-term incentive program (LTIP). His problem? The JV didn’t have one – and some of his best senior managers were now ready to leave for opportunities with a richer upside. Unfortunately, establishing an LTIP required the CEO to overcome some high hurdles.
Unlike a public company, his venture lacked a stock to use as cheap currency for the plan. Likewise, the CEO had to convince six parent companies, each with a separate corporate culture and approach to incentive design, to agree on a model. And he had to come up with a design that reflected the oddities of life in a joint venture – including whether and how parent company benefits not seen on the JV P&L should be included in the plan targets, and how to deal with parent-company imposed restrictions on the venture’s product and market scope that limited the JV’s earnings potential.
Such compensation struggles are typical for JVs.
And our work with dozens of JV Boards and CEOs shows that many JVs with LTIP programs find the current design suboptimal in important ways. In some cases, the program has unintended limitations in its likely value to employees. In other cases, the program does not sufficiently target the outcomes that the shareholders want to incentivize. This might include pursuing synergies with the parent companies, or maintaining plant uptime rather than profitability.
- Joshua Kwicinski and Paul McConnell (Managing Director of Board Advisory, LLC)